cash flow

Are Chinese regulators turning off the cash flow spigot?

Wanda

Chinese regulators have ordered banks to stop lending Wanda money for overseas acquisitions.  The article “Wanda Boss Clarifies Debt Position as Criticism of Deal-Making Grows in China”  reported that “Wanda now looks to be on shaky ground. Authorities are intent on punishing and shaming Wanda for its aggressive overseas deals, which appear to have breached the government’s recent capital controls.”

Wanda’s Chairman, Wang Jainlin leaped onto the world stage with his aggressive buying spree in Hollywood. He purchased stakes in  Legendary Entertainment, AMC, Odeon & UCI Cinemas Group. Wang revealed a bombshell. Deng Jiagui, the Chinese president’s brother-in-law, was a shareholder of one of Wang’s unlisted units (now since sold).

That may have irked some higher-ups in the Communist Party. According to the article “China Puts Wanda Under Spotlight, Closes Off Loan Options For Breaching Investment Rule” Shaun Rein, founder of the China Market Research Group said this:  “People forget that businessmen need to ensure they are low profile, and always give credit to the Communist Party first. Sometimes as these guys get richer, they forget who’s really in charge.”

LeEco

What’s worse is LeEco’s situation. Dubbed the “Netflix of China” who is currently in a corporate “death spiral”. The article “Tencent Co-Founder Brands China’s LeEco A “Ponzi Scheme” said LeEco “Began a wild expansion from its core Internet video business. Burning through billions as it launched costly mobile phone and electric car divisions.” All this expansion was fueled by deep borrowing.

If you’re on a mergers and acquisitions spree – you need to make sure normal revenue will cover your costs.  If not, you dig yourself deeper into debt.

The article “China Takeover Tycoons’ Cash Wall”  reported that “The real engine of these firms isn’t the drudge-work of making profits from selling goods and services. But the art of persuading financiers to fund their investment ambitions.”

How to Keep the Cash Flow Pumping?

  1. Avoid over-expansion: Wanda can forget the theme parks and LeEco can drop the electric cars. Focus on getting butts in theater seats.
  2. Combat poor financial management: Create a timeline of milestones and objectives. Nonetheless, do this before you splash the cash for that shiny new acquisition.
  3. Use financial forecasting based on predictable revenue:  Know your bottom line. Pay your people on time. Or else you (like LeEco) will need bodyguards at your next board meeting.
  4. Know who is really in charge: It’s not you – Mr. Tycoon, it’s the Communist Party. Keep a low profile.
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