I’m genuinely concerned about Konka shifting its focus towards entertainment or returning to the simpler days of the nation's early beauty. My hope is that even if there are changes, Konka strives to evolve into a legendary holding company, which might help soothe public concerns.
The latest trends highlighted in its recent interim report suggest to me that this could be the case. On August 25, Shenzhen Konka A released its mid-2017 report. The figures show that the revenue was 11.406 billion yuan, a 32.49% increase year-over-year; the net profit was 30.87 million yuan, up 140.53% year-over-year; and the earnings per share (EPS) were 0.01 yuan.
The year-over-year growth figures are impressive, yet the actual performance isn’t particularly outstanding. Clearly, the previous performance was lackluster. In the home appliance industry, especially the broader electronics sector, the overall outlook hasn’t been great, with valuations remaining low. To have more than 100 billion yuan in revenue but only 30.87 million yuan in net profit is hard to justify, and this profit wasn’t generated from core operations but rather from non-operating income, primarily through asset disposal. Konka's operating cash flow during the same period was negative, and the magnitude of this deficit was significant. The reality is that the mid-term performance doesn’t look promising.
However, the financial report data alone doesn’t reveal the full picture. Recently, Liu Fengxi, Chairman of Konka Group, mentioned in an interview that television sets were once considered a high-tech industry 20 years ago and were still highly desirable. "Since 2000, however, our focus has shifted to how traditional businesses can adapt," he emphasized, adding that "Konka is no longer just a TV company; it will invest in becoming a controlling investment platform, and the TV business will seek an independent listing."
This essentially sets a mid-to-long term direction for Konka. Yet, hidden details make people feel uneasy:
First, the TV industry was indeed attractive, but claiming that since 2000, Konka has concentrated on "how traditional businesses have transformed" feels exaggerated. Second, stating "no longer just a TV company" and transitioning into an investment holding platform shifts the emphasis to investments over TV operations. Third, announcing the intention to list the TV business independently raises questions about Konka's intentions.
My prediction is that the TV business might aim to raise funds in the future, such as issuing equity and attracting strategic capital. This would allow access to external funding while also applying external pressure. As for pursuing an IPO, it may initially be just rhetoric, potentially aimed at attracting strategic capital.
This strategy depends heavily on the capital base of the Konka Group. If the current Konka A loses its core TV business, the entire business would be hollowed out. It would be challenging for investors to approve, and even if they did, it would be difficult to fill the gap left by the core business.
In contrast, both LeTV and Gome have faced issues when over-relying on their listed subsidiaries. Konka Group might not rule out using its listed companies as platforms to create new financing opportunities for its investment activities. In the future, this might lead to similar instrumental usage. Essentially, the home appliance industry would remain within the Konka Group, much like LeTV being centered around LeTV.com and Gome around Gome.
This structure resembles the model of Lenovo Group's Legend Holdings, but in such a setup, the role of the core business differs. I believe Liu Fengxi’s logic stems from Konka's strong position in China’s home appliance industry. If this were merely a transition, such reasoning would seem empty.
On the other hand, in 2015, Konka faced a severe crisis that could serve as a case study in global business schools, prompting worries that Konka is compromising and overly accommodating major shareholders' shifts.
As a veteran in China’s home appliance industry with nearly 40 years of history, Konka was once among the top three in China’s CRT era. Its awareness shouldn't be considered outdated, but it lacks the ability to integrate critical resources to guide rapid development, often lingering at the level of consciousness and philosophy.
This system imposes many limitations on Konka, leading to ongoing conflicts with major shareholders. The main conflict revolves around industry competition. In China, home appliance manufacturers are largely real estate companies, and Konka’s business model is destined not to fully separate from the land economy and real estate patterns. However, since the major shareholder’s primary business is also real estate (primarily commercial real estate), the two have long competed in the same industry.
For Konka, real estate has dual significance: one, as a natural industrial real estate format; two, many supporting projects can easily convert into commercial real estate formats, even commercial housing, balancing the operational pressure of its own home appliance business. Over the years, the real estate Konka holds has indeed added value. Companies like Gree, Haier, Hisense, Changhong, and TCL also have robust real estate businesses, some of which are already listed. Since Konka is under Overseas Chinese Town’s control, the two sides have continued to play games. Later, to secure key pieces of land, legal disputes even arose.
Over the past few years, Konka has felt a deep sense of crisis, relying somewhat on off-farm income. Real estate business can mitigate some risks. Additionally, though Overseas Chinese Town is a major shareholder, it is not absolutely dominant, holding slightly over 20%. In the long-term game, it continues to hold the upper hand, representing the largest number of board seats on Konka A. This situation has led to a lack of motivation for Konka’s management and general employees for many years compared to peers, appearing quite passive.
After repeated negotiations, Overseas Chinese Town re-established dominance on the board, restoring Konka’s stability. Throughout 2016, the main business regained strength. Although profits didn’t improve significantly, many ventures were from asset disposals. However, the intelligent transformation, especially Internet services, yielded positive results. The most notable initiative was the recruitment of global executives at year-end, though some changes take time, fresh blood has begun to flow.
Since 2017, Konka has been repositioning itself. It aligns with Overseas Chinese Town’s overall transformation and seeks change. This step has shown results. The mid-term report indicated another profit, albeit mostly from non-operating income, the market stabilized.
Yet, it’s clear that Konka Group’s immediate reforms aren’t complete. There are still two risks:
First, the transformation into an investment holding platform isn’t concerning regarding capital strength but requires extensive investment experience. Konka’s积累 in this area is shallow. Although new talent has been brought in, establishing a reputation in the short term is challenging. Moreover, it focuses more on areas promising faster returns rather than exploring new projects.
Second, the home appliance business generates significant revenue for the Konka Group and even Overseas Chinese Town. Long-term, it plays a crucial role in cash flow. However, currently, Konka Group might be overextending in this area. Before expanding its investment control business, the appliance business must not be overly weakened. Otherwise, the entire Konka Group might become hollow.
In 2017, Konka’s revenue target was 30 billion yuan, with net profit reaching 300 million yuan. This indicates that the home appliance industry will still rely heavily on core revenues, with profits potentially coming from outside the industry.
I believe Konka’s transformation is not without challenges. While it has a new direction, it needs to eliminate horizontal competition with major shareholders and address pressures from real estate policies and declining TV sales.
However, Konka’s main industry remains unstable. It’s racing against time. Without forming new revenue streams, especially profit drivers, it risks becoming hollow. Despite the 2017 mid-term report showing surface-level profitability, it relied on certain resource overdrafts. In my view, Konka in 2018 will face greater challenges.
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