- After ‘IPO fever’ in 2016 and 2017, only a handful of Chinese sports businesses listed in 2018 and 2019
- Public markets valued Wanda Sports Group, the most high-profile, far below the company’s target
- Despite this, and broader market concerns, experts take a positive outlook on the Chinese sports industry
The future looked bright for China’s sports industry in 2017.
The state General Administration of Sports had released a five-year plan that envisaged the sector growing to ¥3trn (€3.85bn/$4.26bn) by the end of 2020. Public enthusiasm for participatory events was burgeoning. Media-rights values were regularly hitting new heights.
And Chinese sports business had responded in kind, with huge investment and a rush to listing described as ‘IPO fever’.
Before 2015, there were only eight sports companies listed in China. In 2015, that rose to 27; in 2017, it hit 52. As Zhong Qi, an analyst for Haitong Securities, explains: “The push for sports investment came from the top. Beijing was calling on private capital to invest in the sector.”
But in 2018 and 2019, no more than five companies risked a listing.
Dasong Zhang, an analyst at China Southwest Securities who specialises in the Chinese sports industry, says: “This year, the financial markets have been especially chilly for Chinese companies looking to do an IPO. In fact, in the financial markets IPOs have raised the lowest level of funding for the last 16 to 17 years.” Zhang believes the market has shifted its interest from sports companies towards education and healthcare.
Fu Zhenghao, an expert on the Chinese sport industry, explains to SportBusiness that many Chinese investors during the ‘IPO fever’ years lacked real awareness about the sports sector.
“Investing in the sport industry is about taking the long view, but when speculators came in and found there was little quick money to be made, they left. This is the main reason for the drought in sport company IPOs the last two years.”
The biggest listing in recent years was Wanda Sports Group, which went public on the Nasdaq in July, but even this was a disappointment.
Wanda’s share price closed day one trading at $5.16 a share – a far cry from the initial aspirations of the Dalian Wanda Group, of raising $500m selling 33.33 million shares at between $12 and $15, but still stronger than the recent pricing at close to $3.20 per share.
The sharp decline led US law firms to seek class-action lawsuits from wounded investors, accusing Wanda Sport of publishing misleading business information that could lead to related civil liability, administrative penalties and criminal charges.
A source close to Wanda notes: “The market capitalization of Wanda doesn’t even match how much they paid for the World Triathlon Corporation. Adding the $1.2bn Wanda paid for Infront, with such a current low market capitalization now, Wang Jianlin [chairman of the Dalian Wanda Group] must have lost a few billion dollars.”
Other Chinese companies have also suffered valuation hits these last two years.
Tencent Sports announced a five-year extension of its NBA rights deal in July, at a price almost three times the previous contract. Less than a year later, however, after Daryl Morey’s pro-Hong Kong tweets, the value of those broadcast rights is shrinking rapidly.
Zhang Qing, the chief executive officer of Key Solution Sports Consulting, tells SportBusiness: “Many investors have lost confidence in Tencent after the NBA-Moray issue. Even though Tencent Sports is not a listed company, it has affected the marketplace’s valuation of the company. Tencent still hasn’t resumed the commercial aspects of their broadcasts.”
Cautionary tales from 2016 and 2017, particular that of tech conglomerate LeEco and its subsidiary, OTT operator LeSports, also spooked investors. LeSports, which spent heavily to obtain broadcasting rights for several major sports events, was valued at ¥24bn after a Series B+ round of funding in May 2017. But the company’s business slumped after a spiralling debt crisis led to missed payments for rights deals.
Fu says: “During that period when the Chinese sport market overheated, the premium to buy assets were too high, resulting in these enterprises making huge losses, and running low on capital. That has led to the cool interest in sports investment these last two years.”
Another reason for the slump in valuations of Chinese sport companies is related to China’s overall economic environment. Squeezed by factors of the trade war with the US, inflation, and languishing consumer confidence, China reported that GDP growth in Q3 2019 was just six per cent – the lowest it has been in the past three decades.
Zhang Ying, an investor with Latitude China, says: “This month I just told all companies handling my investments to be very careful with every dollar. The whole investment marketplace outlook is poor, with a lot less hot money than the previous two years. Sport-linked companies that aren’t profitable are having hard times.”
Despite all this, most of the experts polled by SportBusiness maintained a positive outlook on the Chinese sports market over the next five years.
Fu explains: “In terms of economic value, the sports industry in China still has great potential to grow. China’s sports industry now accounts for one per cent of GDP, and the United States is at three per cent. Given China’s new targets for its domestic sports industry, the growth potential is very high.”
Zhang concurs: “In fact, the industry is under-valued, which makes it ripe for investment, and the IPO scene for Chinese sport companies should improve.
“Hundreds of Chinese athletes will take part in Tokyo 2020, and with other mega-sporting events like the 2022 Beijing Winter Olympics and the 2022 World Table Tennis Championships in Chengdu coming up, the sports scene in China will only continue to grow. “
In October this year, the Chinese government revised its plan for the development of the country’s sports ecosystem; it still involves growing the sector to four per cent of GDP, or between $2tn and $3tn, but the timeline has extended to 2035.