Troubled Chinese electrical retailer Gome may offload part of its stake to outside investors to shore up its cash flow and counter the retail market slowdown, according to analysts.
Gome, whose founder Huang Guangyu is currently being investigated for his role in a share trading scandal, is increasingly looking at the stake sale as a viable option as banks are also reluctant to sanction any fresh loans, they said.
Besides bank loans, there have also been media reports that the company is already facing difficulties in getting short-term credit from suppliers.
According to a report from Financial Times, Gome is holding preliminary talks with overseas equity firms over possible sale of a strategic stake.
Gome's spokesperson He Yangqing did not deny the report, but refused to comment on the same citing corporate policy.
"The company had been facing the problem of (sluggish) cash turnover from the middle of the year, much before the scandal broke out," said Wu Meiping, senior researcher, Essence Securities.
"Gome has also been losing favor among the electronics suppliers especially since Huang was arrested late last month," Wu said.
According to the FT report, Gome's executives have recently talked to "several overseas rivals for an investment", but these are "early days and all sides are feeling their way around".
The Huang probe and suspension of its shares have not gone well with the suppliers and this in turn has squeezed cash flow for a short period, said Wu.
Tian Huilan, analyst, First Capital Securities, said the long-term prospects for Gome look dim. "I have doubts on whether the company can weather a slowing retail market by selling stake to foreign investors."
Analysts said the company's reckless expansion spree in the last few years have put it under severe financial stress.
While its main rival Suning adopted a steady expansion path, the aggressive Gome opened outlets even in far-flung locations and in many cases at high rentals, they said.
The company's shares have also been falling continuously over the last few months. Gome shares closed on Nov 21 at HK$1.12, with a market capitalization of HK$14.3 billion. Just a year back the share prices were as high as HK$21. Its trading has been suspended since Nov 24.
"I'm concerned at how much share Gome and Huang would sell and whether the company would lose its influence on the retail market," said Tian.
Huang holds around 36 percent stake in Gome, with second largest shareholder JP Morgan owning 8.88 and the third largest Morgan Stanley 8.17 percent.
Founded in 1987 from a small shop, Gome has grown to become the largest electrical retailer in China with over 1,300 stores. Its closest rival Suning in comparison had just 784 stores at the end of September.
Gome has a 40 percent share of the electrical retail market in the country, while Suning holds a mere 7 percent.
Analysts said that the shareholding pattern in Gome may act as a deterrant for any stake sale as it would need approval from the majority shareholder Huang.
It is also unclear on how the probe findings would impact the company in the near future.
To cope with the crisis, Gome has appointed its CEO Chen Xiao as acting chairman. But the company is still vulnerable to fresh bouts of turbulence, analysts said.
According to Wu, the priority for Gome is to improve cash turnover and win back consumers', suppliers and market confidence.
(China Daily December 17, 2008)