Does China have a retailer who can fulfil the country's growing demand for electronics? Rupert Hoogewerf discovers whether Huang Guangyu is the man for the job.

“Our business is still very small,” opens Huang Guangyu , China 's richest man with a personal wealth of US$1.3 billion, “especially compared to the big players in the world. I am proud if through the work we do that we can win the respect of society.”

On the other side of the world, nearly half a century ago, Sam Walton did win the respect of America . As the people's retailer, Walton pioneered the Wal-mart chain. From a small-time retail operation, Wal-mart became a world-wide success – by giving the American people what they wanted: consistent low prices. Huang aims to do the same.

Huang Guangyu, known in Hong Kong by his Cantonese name Wong Kwong Yu, is the founder and President of Eagle Investments, the holding company for GoMe, China's electronics retail giant, which sells air-conditioners, refrigerators and DVD players, and a Beijing property business. Riding on the back of China's retail boom, GoMe is the market leader for electronics retail and the third largest retailer in the country overall by sales with US$2.1 billion last year – and 150 outlets, 10,000 employees and a further 30,000 others associated with the group.

The boyish smile of 35-year-old Huang belies the taskmaster behind his retail and property empire. As a backdrop, an eagle's crest peers down from above Huang's desk and on a far wall hangs a picture with the 24 different seals of the Emperor of China, representing each of the Emperor's different civil duties. From humble beginnings, Huang – in a dark suit, blue tie and white shirt – and his office are dressed for success.

Rags to riches

Born into a poor farming family in Guangdong 's Shantou , the same town as Asia 's richest man Li Ka-shing, Huang supplemented his mother's meagre income by selling used books and abandoned plastic bottles after school. In 1986, the 17-year-old Huang and his older brother, Huang Junqin , left for Inner Mongolia with US$500 worth of radiograms and electronic watches bought cheaply from local stores, aiming to take advantage of the huge price differential between the north and south of China . Several months later, the brothers moved to Beijing , starting out as a clothes retailer, but later switching to retailing electronic goods.

“In the early days, we were just out to make money,” admits Huang. They soon hit upon their strategy: Unlike other stores that aimed to buy cheap and sell as expensively as possible, the Huang brothers sold at the lowest possible price to attract more customers through their doors. As business picked up, the brothers expanded across Beijing .

In 1992, the brothers reached a milestone with the successful diversification into real estate amid the completion of Eagle Plaza . But, an important difference came to light: Huang preferred retail, his brother real estate. One year later, they parted ways with Huang swapping his share of the real estate business with his brother's share of the retail business. “It made sense to go our own ways,” reminisces Huang. His brother (number 27 on the China Rich List) has since gone on to build a formidable real estate business and ranks. Huang clearly knew his niche.

Nation-wide expansion followed in 1999 with the first retail outlet outside Beijing in neighbouring Tianjin . “We were very thorough in our preparations, especially our management systems, which play such a key role in cashflow,” explains Huang.

The next big step came in February 2002 when Huang purchased his Hong Kong listed vehicle (0493 China Eagle Group) for US$160 million, into which he injected his property portfolio, followed in November with the take-over of the Shanghai-listed Ningcheng Laojiao (Shanghai – 600159), a spirits distiller.

A total experience

Whilst price competitiveness played a key factor to his early success, Huang suggests that today the customer “ wants to know they are not being ripped off”. Explaining the obvious assumption, Huang continues: “This is where our experience and brand comes into play. We offer our customers a total experience.”

Conrad Tsang, a senior VP at Barings Private Equity, agrees: “It is all about building a brand and building key locations. Size also gives a distinct advantage to leading retailers like GoMe, allowing them to invest into pre- and post-sales services, which play a key role in the customer's choice of retailer.”

“GoMe is an important customer of ours in China ,” says Yu Yaochang, deputy general manager of Galanz, the world's biggest microwave business with close on half of the global market. “They have solid coverage across the country, although some competitors are stronger in individual regions, such as Suning in Jiangsu .”

Execution and speed

GoMe has courted the press recently. This summer, Huang injected 65% of his privately-owned GoMe into his Hong Kong listed vehicle to prepare for future rounds of finance. “Listing this way saved me nine months of the normal listing process, giving GoMe the status of a listed company and, as such, access to capital markets as we plan its expansion,” explains Huang. “It keeps me ahead of the pack.”

And the race is indeed on – with no obvious winner to date. GoMe and its two key competitors, the Jiangsu-based Suning and Shanghai-based Yongle, are all expanding as fast as possible. But this requires financing.

In July, Suning, the second largest electronics retailer, raised US$48 million in its initial public offering on Shenzhen's second board. Yongle, Shanghai 's dominant player, is eyeing an overseas listing and is rumoured to be inviting Morgan Stanley to take a 10% stake in it as preparation for the listing. Huang is not being left out.

Property and retail: a match made in heaven?

“GoMe's success lies in its unique combination of retail, real estate and finance,” says James Chen Mingjian , CEO of HollyHigh International Capital. “In the late nineties, it used its cashflows to invest into new offerings on the domestic stock market, switching to real estate in the early 2000s.”

One reason for GoMe's fast growth has been the absence of any serious international competitors. “We are still small compared to our international competitors,” reiterates Huang. But that difference is becoming less significant. Best Buy, the leading US electronics retailer, had sales last year of US$22 billion from 1,800 outlets. Dixons, the leading European player, pulled in US$11 billion from 1,400 outlets. Their penetration may be deeper, but their growth is not as explosive as retailers in China . “Wal-mart came into China at a time when there was little domestic competition to speak of amongst the hypermarkets, whereas none of our international competitors have made strong forays into China ,” explains Huang. “The barriers to entry are getting higher.”

Xu Xiaofang, Guotai Jun'an Securities retail analyst, agrees: “The market is not so attractive to the dominant international players, since the margins are low and competition is intense.” Xu sees this as positive: “In the long run, China 's retailers have a competitive advantage in that more and more of the world's household consumer electronics are made in China .”

But what of December this year when foreign retailers can open unlimited outlets? Huang replies confidently: “The WTO will allow us to learn from international retailers and vice-versa. We have been researching this question for a number of years.”

For real estate, Eagle Towers is still the flagship development, completed by the Huang brothers in 1992. “Even today it has one of the largest floor spaces around in Beijing, with 7,000 square meters per floor, which makes it appealing for large multinationals to rent,” says Huang with a touch of pride. Huang's first solo development was Eagle Homeland, completed in 2001.

In the past four years, Huang has started to build up a significant land bank in Beijing . At the end of this year Eagle will start selling GoMe Homeland, a million square meter development in Beijing that will be using the GoMe brand for the first time. Eagle Investment is currently developing a further five projects.

Within five years, Huang expects real estate to bring in higher profits than GoMe. “Our ambition is to be amongst the top three developers in Beijing within five years,” Huang boasts. When pressed on future sales expectations, Huang laughs and suggests that the top five would do. “The important thing is to have a company goal.”

Financing the future

Restricted by government regulations that foreigners cannot own more than 65% of a retail business in China today, Huang could inject only 94 of GoMe's outlets into the his Hong Kong listed vehicle. This includes the flagship outlets of Beijing , and Tianjin and Shenzhen outlets – but even this was too large for the small listed vehicle, which only has a market cap of US$100 million. In return, the listed company issued US$31 million worth of shares and two tranches of three-year convertible notes worth US$1.1 billion to fund the purchase.

The plan was to place 35% of the shares of the listed company with institutional investors. Unfortunately, weak market sentiment put paid to this. Even a last-ditched 17% reduction of the price by ABN AMRO Rothschild, the sole manager of the stock, could not save the deal. Huang is phlegmatic about the result, adding he withdrew the offer because “We do not need the capital today”. In reality, Huang was disappointed by the lack of market interest.

As it often is, on issue was the pricing of the offer. Walking over to his desk, Huang brings back a calculator and starts to explain the rationale of the US$1.6 billion valuation of GoMe. “We used a future Price Earnings (P/E) ratio of approximately 19, which is not especially high for our industry. Our profits to the end of this May of US$350 million suggest we ought to make profits of US$850 million for the year.” Like a schoolteacher, Huang draws out an important part of the lesson: “Remember, too, I should charge a premium for giving away control to the listed company.” As support, Huang adds that Wumart, a leading Beijing hypermarket and department store retailer, trades at a much higher P/E ratio and it is not even the market leader.

Key competitors

“We consider the small shop on the street corner still to be our key competitor, rather than the likes of Suning or Yongle,” notes Huang. “Our market has traditionally been highly fragmented.” The Ministry of Commerce estimates GoMe to have 4% of the US$600 billion a year retail industry and growing at 10.5%. Huang suggests this to be on the high side, due to the difficulty of keeping tabs on the millions of small family-run outlets.

Another form of competition comes from large retailers like Haier and TCL, who are establishing their own distribution in an effort to maintain their profit margins in the face of price cuts by the large retailers like GoMe.

Today, GoMe has 162 outlets and counting. They are between three and six thousand square metres, in 38 cities in Mainland China and one in Hong Kong , which opened last November. “We do not need bigger outlets,” insists Huang, “since otherwise we will be passing these costs on to the customers.”

Where to next?

Over the next three years, Huang expects GoMe to continue its expansion to China 's second-tier cities. “ Hong Kong was a trial-run for us,” says Huang, where he is up against Li Ka-shing's Fortress chain. “Our next step overseas lies with South East Asia .”

GoMe has announced the listed company's plans to open a further 94 main outlets and 478 smaller outlets to sell higher margin mobile phones and digital products by the end of 2006, as well as 5,000 video shops within five years.

The cashflows created by the retail business, coupled with the possibilities it offers for real estate, offer plenty of opportunity for the young Huang to build his business even further.

The night before our interview, Huang was up until five in the morning. “I never put off till the following day what I can finish today, even if it takes me all night,” Huang says. Perhaps this pragmatic approach has something to do with his Shantou upbringing? Or, is this how it's done – how Sam Walton, like Wal-mart, became a household name in America, and Huang Guangyu will ensure his place among the most important businessmen in China? With the proud eagle's crest beaming down from his desk and the reminder of the 24 different seals of the Emperor of China, Huang is taking the challenge head on.