I’m genuinely concerned that Konka might shift its focus towards entertainment or revert to the early days of the country's beauty. I hope that even if there are changes, it will strive to evolve into a legendary holding company, which could help stabilize public sentiment.
The latest trends outlined in its recent interim report suggest that this might indeed be the case. On August 25, Shenzhen Konka A released its mid-2017 report. The figures show that the revenue reached 11.406 billion yuan, a year-on-year increase of 32.49%; the net profit was 30.87 million yuan, up 140.53% year-on-year; the earnings per share (EPS) were 0.01 yuan. The year-on-year growth rate is impressive, though the actual numbers aren’t particularly remarkable. Clearly, the previous performance wasn’t stellar. In the home appliance industry, particularly in the broader electronics sector, the overall performance has been lackluster, with low valuations. Earning over 10 billion yuan in revenue but only achieving a net profit of 30.87 million yuan is hard to justify, and this profit isn’t from core operations—it largely stems from non-operating income, primarily asset disposal. During the same period, Konka’s operating cash flow was negative, and the amount was significant. The overall mid-term performance appears far from ideal.
However, the financial report data alone doesn’t fully capture the underlying trends. Recently, Liu Fengxi, Chairman of Konka Group, told the press that color TVs were once a high-tech industry 20 years ago, and they were still considered glamorous. "Since 2000, our focus has shifted to how traditional businesses adapt," he emphasized, adding that "Konka is no longer just a color TV company; it will invest in a controlling investment platform, and the color TV business will seek an independent listing."
This essentially sets a medium to long-term direction for Konka. However, the hidden implications make people feel somewhat uneasy:
First, the color TV industry was indeed attractive, but saying that since 2000, Konka has focused on “how traditional businesses have changed†implies significant support. Second, "no longer just a color TV company" indicates a transformation into an investment holding platform. The emphasis here suggests that the entire group structure will pivot around investments, with color TV business being secondary. Third, knowing that the color TV business is sluggish, announcing plans for an independent listing raises questions about its intentions.
My intuition is that the color TV business might aim to raise funds in the future, such as by releasing part of its equity and attracting strategic capital. This approach could provide external funding while increasing external oversight. As for seeking an IPO, it might be more of a rhetorical strategy, especially aimed at attracting strategic capital.
This must be done within the framework of the Konka Group. After all, if the existing Konka A loses its core color TV business, the entire business could become hollowed out. Investors would find it difficult to accept this, and even if they did, filling the resulting void would be challenging.
In contrast, both LeTV and Gome have had experiences of 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 business. In the future, there could be similar instrumentalization. Essentially, the home appliance industry would remain within the Konka Group, much like LeTV's LeTV.com or Gome's Gome.
This structure seems common, akin to Lenovo Group's Legend Holdings model, but in this framework, the role of the core business differs. I believe Liu Fengxi’s logic is based on Konka’s strong position in the home appliance industry in China. Without this foundation, such a statement would be baseless.
On the other hand, in 2015, Konka faced a severe shock that could serve as a case study in global business schools. People are naturally worried that Konka might be compromising and excessively catering to changes led by major shareholders.
As a veteran in China’s home appliance industry, Konka has nearly 40 years of history and was once one of the top three players in China’s CRT era. Its awareness shouldn’t be described as backward, but it lacks the ability to quickly integrate key resources and guide change. Instead, it remains stuck in outdated thinking.
This system imposes many limitations on Konka, leading to continuous conflicts with its major shareholders. The main conflict revolves around industry competition. In China, home appliance manufacturers are essentially real estate companies, and Konka’s business model is bound to remain intertwined with the land economy and real estate patterns. Given that the major shareholder’s main business is also real estate (primarily commercial real estate), competition between the two continues for a long time.
For Konka, real estate has dual significance: it represents a natural industrial real estate form, and many supporting projects can easily be converted into commercial real estate formats, balancing the operational pressure of its own home appliance business. Over the years, the real estate it holds has indeed helped mitigate some risks. Gree, Haier, Hisense, Changhong, and TCL also have strong real estate businesses, with some already listed. Since Konka is under Overseas Chinese Town’s control, the two sides continue to play a game of chess. Later, to secure a key plot of land, it even ended up in court.
Over the past few years, the sense of crisis at Konka has been profound, and its main business has been heavily reliant on off-farm income. Real estate business helps balance some risks. Additionally, although Overseas Chinese Town is the major shareholder, it doesn’t have absolute control, owning only over 20%. However, in the long-term game, it retains the upper hand, and its interests represent the majority of seats on Konka A’s board. This situation has led to a lack of motivation for Konka’s management and general employees for many years compared to its peers, making it appear quite passive.
After prolonged negotiations, Overseas Chinese Town reasserted control over the board, and Konka regained stability. Throughout 2016, the strength of its main business was restored. While profits didn’t see a real change, many businesses were driven by asset disposals. However, intelligent transformation, particularly Internet services, yielded positive results. Of course, the most significant highlight was the implementation of a global executive recruitment process at the end of the year. Although some aspects couldn’t change immediately, new talent flowed in.
Konka has been repositioning itself since 2017. It aligns with Overseas Chinese Town’s overall transformation and seeks change. This step has indeed shown results. The mid-term report showed another profit, though it was largely from non-operating income. The market also stabilized.
However, it’s clear that Konka Group’s immediate reforms are incomplete. There are still two risks:
First, while we’re not worried about its capital strength, it needs rich investment experience. Konka’s accumulation in this area is shallow. Though there are new talents, it’s hard to establish a reputation in the short term. Also, it doesn’t invest in new projects but focuses on areas promising faster returns.
Second, the home appliance business has generated substantial 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 this part of the business. Before expanding its investment control business, the appliance business mustn’t be overly weakened. Otherwise, the entire Konka Group might become hollow.
In 2017, Konka set a revenue target of 30 billion yuan and aimed for a net profit of 300 million yuan. This means the home appliance industry will still rely heavily on core revenues, and profits might still come from outside the industry.
I said that Konka’s transformation isn’t calm and doesn’t entirely deny the path it chose. It does have a fresh perspective, helping eliminate horizontal competition with major shareholders and alleviating pressures from real estate policies and color TV growth.
However, Konka’s main industry isn’t stable. It’s racing against time. If it fails to develop new sources of revenue quickly, especially in profit-making areas, it risks becoming hollow. Although the 2017 mid-term report appeared profitable on the surface, it relied on certain resource overdrafts. In my view, Konka will face a greater challenge in 2018.
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