Recently, Chinese men’s wear giant Youngor Group Co.Ltd(600177) announced that in order to further focus on the construction of fashion industry and enhance the core competitiveness of the enterprise, the company plans to withdraw from the health industry, donate Puji hospital and related assets to Ningbo Municipal People’s government, and request the general meeting of shareholders to authorize the management to handle relevant matters. According to Youngor Group Co.Ltd(600177) introduction, the estimated value of the assets to be donated is 1.36 billion yuan (subject to the final accounts), and the impact of the above donation on the company’s net profit in 2022 is expected to be 1.02 billion yuan (subject to the audit data).
It is worth noting that Youngor Group Co.Ltd(600177) ‘s main business has always been clothing, and the company started the construction of Puji hospital project in 2018 and completed the acceptance recently. The donation had an impact on the net profit of the listed company of more than 1 billion yuan, while the company’s attributable net profit last year was 5.127 billion yuan, which had a great impact.
The author believes that enterprises should be cautious in cross-border operation and management. But in reality, many enterprises are still trying to break common sense, mainly because the enterprise management is often overconfident.
From the perspective of building a long-term competitive advantage and maximizing the interests of shareholders, the management of the enterprise should understand the following “common sense”: first, the long-term goal of the enterprise is to continuously improve the return on capital, rather than rapidly expand the scale of business income and profits through cross-border investment or M & a; Second, only by persisting in studying a field for a long time can we form a long-term core competitiveness, otherwise it is easy to fall into a dilemma; Third, when the business management can not achieve growth through the main business, they should carefully weigh the risks and benefits between dividends and new business.
First, the long-term goal of the enterprise is to improve the return on capital. However, the management of enterprises often ignore this goal and instead focus on the growth of operating revenue and net profit. Generally, revenue and profit growth do improve the return on capital of shareholders, but investors and management often ignore the negative impact of new capital or equity dilution.
For example, cross-border M & A in new fields through fund-raising is a way to quickly realize the growth of operating revenue and profit, but this method will lead to the increase of shareholders’ capital investment or dilution of shareholders’ equity. Therefore, many listed companies reduce the return on shareholders’ capital due to cross-border M & A.
Secondly, competitive advantage can only be formed by long-term research. Ge is an enterprise that operates across many fields, but it was once in trouble. Jack Welch reformed the management of Ge after taking over, that is to “only be the first or the second” in all fields involved by GE, and quit the subdivided field if he couldn’t. According to the author’s statistics, Jack Welch served as CEO of General Electric from 1981 to 2001. During this period, the share price of General Electric increased by 57.38 times (21.27% annualized), and the S & P 500 increased by 8.45 times (10.7% annualized) in the same period, which shows the brilliance brought by the focus strategy to General Electric.
Finally, the management should carefully evaluate the relationship between new investment and dividends (including stock repurchase). When the main business of the enterprise cannot form a new growth point, the enterprise has two choices: the first is to develop new business, and the second is to pay dividends or buy back shares. New investments will naturally generate benefits, but they will also face risks. The standard for weighing the two schemes is not the growth rate of operating income and profit, but the marginal return on capital. If the marginal return on capital decreases due to new investment, it is not as good as dividend or stock repurchase.
In short, enterprises should be cautious about cross-border. We can also revisit Buffett’s classic quote: “if investors are willing to double the price to fund the princess (referring to the management) to kiss the toad (referring to a new field or the subject of M & A), it’s best to bless the miracle. Many princesses still believe that their kiss has the magic to turn the toad into a prince, even if there are a lot of toads in her backyard.”
