After a devastating draw with the Hong Kong SAR team at the World Cup Qualifiers, it took less than four days for Chinese football fans to heal their wounds, as the Guangzhou Evergrande (3333-HK) Taobao Football Team took their second AFC (Asian Football Confederation) Champion, by winning 1-0 against UAE’s Al-Ahli during the second leg of the finale. In parallel with their huge success in football, Evergrande-Taobao FC is also raising money on the NEEQ (National Equities Exchange and Quotations), also known as the “New Third Board” (Xinsanban 新三板), the equity exchange for startups that could eventually get listed on the main boards. The question thus arises – is this a good bet for investors after all?
(Hui Ka Yan and Jack Ma at the lising debut, source: Yicai.com)
Pre-Money Valuation on par with the Finest Clubs in the World
With a capital base of 375 million shares and the issuing price set at 40 RMB/share, the pre-money valuation of Evergrande-Taobao FC is as high as 15 billion RMB(2.3 billion USD). This is not a low valuation at all, considering the New-York listed Manchester United’s market capitalization at 3 billion USD and the recent acquisition of Manchester City FC by CMC Capital, which values the entire club at 3 billion USD as well. Evergrande has undoubtedly become one of the most expensive sports clubs in the world.
The shareholding structure prior to the listing was rather straightforward – Dr. Hui Ka Yan’s Evergrande owned 60% of the company, whereas Jack Ma’s Alibaba took up the rest. Alibaba just acquired the company in 2014 at a price tag of 1.2 billion RMB, of which stake is currently valued at 6 billion RMB, already 5 times the original cost. That said, Alibaba’s motive is not to just make hefty returns out of this acquisition, but to expand Alibaba’s exposure in the sports and entertainment space, confirmed by their recent move to sponsor the FIFA World Club Championship, of which Evergrande Taobao FC is a serious contender.
The dilution effect of the NEEQ-listing does not affect Evergrande’s control status of the club, with post-dilution ownership at 51%.
Cash Burning “Moneyball” at its best
The main attractiveness of this piece of asset is evident – Evergrande is unequivocally one of the most successful sports clubs in China and Asia during the past 5 years. Arising from a low starting point (only a Series-B Team in 2010), Evergrande has already won 5 consecutive Chinese Super League Champions and 2 AFC Champion’s League Champions. It also ranked no.1 in Asia in worldwide football club ranking (http://footballdatabase.com/ranking/asia/1). Despite its success in football, the company has been burning cash more than rapidly, devoting most of its capital resources in acquiring a stellar squad, composing of Brazilian national team players, i.e. Paulinho, Robinho, Goulart and Elkeson, as well as world-class coach Luis Scolari. The team has spent cumulatively more than 1 billion RMB on players’ transfer fees (440 million in 2015 alone). The “moneyball” strategy cost the club a cumulative loss of more than 1.3 billion RMB in less than two and a half years, according to the latest financials disclosed by NEEQ.
The business model of the club, similar to most other football clubs in the world, primarily relies on advertising & sponsorship revenues, which approximately account for around two-thirds of its revenue base in 2014. Some of its advertising clients include LVMH, Dongfeng-Nissan, Unilever and Vasto. Gate and matchday turnover is about 25% of total, which can be quite volatile depending on the club’s performance each year. Championship bonuses and merchandise revenue basically covers the rest of the revenue base, which also depends on the team’s performance. Apart from these revenue sources, the club has established “strategic partnerships” with Tmall, Nike, and Chow Tai Fook, substantiating the brand value of the club. However, if compared to the most successful clubs in the world, Evergrande’s revenue was only about a tenth of their average level, suggesting that it is still far from mature from a business perspective.
(Source: Deloitte World Football Clubs Report, NEEQ)
Sponsorship conflict with Dongfeng-Nissan casts shadow on credibility
(Evergrande Life Insurance surprisingly replaced Dongfeng-Nissan’s jersey sponsor position during the second leg of AFC Final, source: jiemian.com)
In retrospect, Dongfeng-Nissan has been Evergrande-Taobao FC’s exclusive jersey sponsor since 2014, but it was unilaterally replaced by “Evergrande Life Insurance” during the second leg of AFC Champion’s League Final. From the perspective of Dongfeng-Nissan, the move is “shocking” and “uncommercial”, and it has launched legal action against Evergrande club for changing jersey sponsors without prior approval. Nevertheless, Evergrande Life has been one of the key business initiatives for Dr. Hui’s group this year and the group seems to be unaltered by the possibility of losing credibility with its clients. It is also not the first time that Evergrande has promoted its own product during a key football match, as it rolled out its “Evergrande Spring” mineral water brand during the 2013 AFC Final. The brand alone has cost Evergrande another 2.3 billion RMB in 2014, which is an alarming bell for investors who have been keen on Evergrande’s ability to expand and adapt to new industries.
8-billion RMB broadcasting contract a potential game changer
On a broader horizon, one of the main reasons Chinese football clubs have trailed behind their European counterpart business-wise, was the limited broadcasting revenue during the past decade. Prior to 2012, China Super League(CSL)’s broadcasting contract was worth less than 15 million RMB per year, due to multiple referee and official scandals within the CFA(China Football Association) and low broadcasting value compared to other entertainment programs. However, after the anti-corruption campaign and the participation of more notable foreign players in the CSL, the broadcasting revenue has expanded by more than 5 times during the past two years. In October, after a series of competitive bidding and price war, China Sports Media(体奥动力), a subsidiary of China Digital Culture and portfolio company of CMC Capital, won the broadcasting right of the CSL for the next five years at a jaw-dropping price of 8 billion RMB. What it also means is that the league has to share this 8 billion RMB in the next 5 years with 16 clubs of the league. In the past, the league used to take 36% of the total broadcasting income, with each of the clubs taking 4% of the share. It might not be the case this time – one of the board members of CSL revealed that 90% of the broadcasting revenue might be shared among each clubs, giving more than 100 million RMB revenue each year if shared equally among the 16 clubs.
Stronger teams in top European leagues have usually been subsidised by better broadcasting revenue – in the Spanish league, Real Madrid and Barcelona took up 40% of the total broadcasting share; German Bundesliga has a more egalitarian approach, but Bayern Munich still doubled the amount of broadcasting compared to that of the lower ranked team; England’s Premier League has a unique way of dividing income – 50% of the revenue was shared equally; a quarter of the revenue based on rankings and the other quarter based on the number of games broadcasted/total number of audience. If the CFA somehow follows the European approach, it will further benefit the likes of Evergrande, who ranks in the top bracket and has attracted more audience than any other clubs in China.
It is easy to draw a knee-jerk conclusion that the 15 billion RMB valuation may seem a bit too high for Evergrande Taobao FC, given its relatively poor financials and low influence on a global basis. However, this reflects the current sentiment in the Chinese capital market – Evergrande Taobao FC is considered the top IP source within the domestic sports industry. If reasonably commercialised, there are further benefits to be unearthed in terms of both commercial and match revenue, not to mention its strong football talent pool that can also generate positive income going ahead. It is also an evidence that Chinese sports industry is still in its infant phase when the initial investment hasn’t seen positive return as of now. Going forward, despite harsh competition within this space, it is expected that more investments will be drawn into this industry due to the consumption upgrade and the loyalty of sports fans, which is still a relatively new way of living for most Chinese. The 15 billion may seem crazy, but it is built on a “long, slippery” slope that investors could not overlook.