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Lecture on 'Asset-Light' by Wang Jianlin at Shenzhen Stock Exchange

Jun 02,2015

Lecture on 'Asset-Light' by Wang Jianlin at Shenzhen Stock Exchange

--"Heavy assets" will disappear from Wanda Plazas, meaning that Wanda Commercial Properties will be transitioned from a real estate developer to a business investment service operator.

--We believe the Chinese real estate industry has come to a turning point in terms of supply and demand, and the era of huge profit has come to an end.

--As the fashionable saying goes, the best business is to do your business with investments from others.

During the 8th entrepreneurship forum of Shenzhen Stock Exchange (SZSE) held on April 15, Wanda Group Chairman Wang Jianlin gave a keynote speech entitled "The Asset-Light Model at Wanda", where he elaborated for the first time on the Group's asset-light strategy.

Below is the English translation of the transcribed speech:

The 'Asset-Light' Model at Wanda

As a leading world-class estate developer, Wanda now boasts the largest properties (measured in combined floor area) under management all around the globe. Revolving around property development, we have expanded our business presence into many other sectors. The company has embarked on a full-scale transition since last year, based on analyses of the future trends in the real estate industry: from a geographical perspective, we are driving a shift in the company toward a multinational enterprise; in terms of business lines, the company is in the midst of a transition from a property-oriented enterprise toward a high-tech service supplier. Today, I will focus my speech on the transition of Wanda's core business – commercial real estate.

1. The asset-light strategy at Wanda

(1) What is asset-heavy? And what is asset-light?

What is asset-heavy? City complex is the main product of Wanda Commercial Properties. This product model starts with the construction of a large Wanda Plaza supplemented with auxiliary properties such as offices, retail stores and apartments, whereby the supporting properties are sold and the resulting proceeds are invested in the Wanda Plaza for long term operations. The absence of long-term property investment financial products in China means that Wanda has to rely on property sales for its leasing business. All Wanda Plazas are owned and managed by the company itself, and it also receives full rental revenues – this model is called asset-heavy.

And what is asset-light? It is a different model where the construction of Wanda Plazas is funded exclusively by external investors, and Wanda takes care of site selection, project design and construction, merchant attraction and property management, leveraging the brand appeal of Wanda Plaza and its unique "Huiyun" intelligent business information management system. With this model, the rental income is shared between Wanda and the investors according to a certain distribution ratio. We started developing this totally new model (namely asset-light Wanda Plaza) last year, and has put it into practice now.

2. A transition toward asset-light

Going forward, the transition at Wanda will be oriented toward the asset-light model. As of the end of 2014, a total of 109 Wanda Plazas have been opened, with 26 new projects due to open in 2015, bringing the total area of properties under management to over 25mn square meters. All of the new plazas this year will be operated under the asset-heavy model – given the 3-year construction cycle involving site selection, negotiations, architectural design, land purchase and opening, it is impossible to apply the asset-light model to the new projects in 2015. However, of the 50 plazas planned for 2016, more than 20 will be developed and operated as "light assets". From 2017 onward, we will keep opening at least 50 new plazas every year, and over 40 of them will be asset-light. Of the 90mn square meters of our existing land reserve, over 20mn square meters are planned as self-owned properties, and 70mn are developed for sale. We plan to digest these 70mn square meters of properties within five years. In other words, "heavy assets" will disappear from Wanda Plazas, meaning that Wanda Commercial Properties will be transitioned from a real estate developer to a business investment service operator – similar to hotel management companies – featuring fully asset-light operations.

2. What caused the asset-light transition?

Wanda's asset-heavy business has been performing well and has good potential for future growth. Urbanization is still in full swing in China, and the Wanda model has been copied by many property companies. So why did you decide to move toward asset-light?

(1) To increase our competitiveness
With 135 Wanda Plaza in operation by end-2015, we will be the largest commercial real estate developer in the world. It would be an achievement big enough for us to become complacent. Sit back and relax and watch property leasing grow naturally. But we have more ambitious goals – relative to a market with nearly 1.4bn consumers, our market share is still too small, and we must continue to scale up to consolidate our competitive edge. The asset-heavy model is inherently influenced by the cyclical nature of the property industry. During a property boom, it is very easy to increase sales during and maintain a healthy capital flow as well as driving business growth. However, we believe the Chinese real estate industry has come to a turning point in terms of supply and demand, and the era of huge profit has come to an end. Going forward, property developers must achieve high standard branding, pricing, marketing, etc. operations to survive in the marketplace. There is still room for the asset-heavy model to develop further, but it is confronting increasing challenges. The asset-light strategy is the answer to scaling up our businesses. The Wanda Plaza brand has a solid reputation. Many organizations and individual investors have come to us asking for investment opportunities. It is an opportunity too good to miss. As the fashionable saying goes, the best business is to do your business with investments from others. We aim to grow bigger and bigger during the next five years and beat all our competitors. We are building a wider and deeper "moat" for the Wanda brand.

(2) To tap into markets in small/medium-size cities

Some analysts asked me why shouldn't Wanda keep focusing on tier-1/2 cities? Are the housing price and rental high enough in tier-3/4 cities? This represents a misperception about the real estate business. The most important indicator in property development is not housing price or rental per square meter. Rather it is the rental yield, i.e. the ratio of rental to investment (the annual rental revenue after deducting taxes divided by total property development). In this respect, property projects in tier-1/2 cities may even be inferior to those in tier-3/4 cities, because the former entails greater land costs and heavier investments.

Housing price is the primary consideration in the asset-heavy model, where investment is limited only to projects with high sales profits. This would keep us out of tier-3/4 markets. By contrast, the asset-light model only involves pure investment without property sales, whereby investment can be made in projects as long as the local urban population is large enough to maintain a reasonable rental yield. This enables us to enter the local markets of many tier-3/4 cities. The biggest challenge in these markets lies in how to attract merchant occupants, and such a barrier prevents most developers from entering these cities. For us, merchant resources happen to be one of our biggest competitive advantages – we have more than 5,000 contra

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