Thriving on sales of electronic products, Jiangsu-based Sanpower Group is one of the time-honoured domestic retailers. Its subsidiary Hisap mall, which earned “the first bucket of gold” for the Group, has been number one among the retail channels.

In 2014, Sanpower spent $500 million purchasing Nanjing International Financial Centre (IFC) from Li Ka-shing’s subsidiary fund, acquired Mecox Lane through its Cnshangquan Network, acquired mobile phone channel Funtalk Telecommunications, and finally became a major shareholder of the group buying website Lashou Network.

Overseas, Sanpower's Nanjing Cenbest spent £450 million buying the UK’s fourth largest department store House of Fraser (HOF), which has created China’s largest foreign investment in retail. It also won the bid for the well-known innovative products retailer Brookstone in America, and acquired the Israeli medical services business Natali.

These moves have made many investors wonder what are the underlying strategies behind Chairman of Sanpower Group Yuan Yafei, the retail tycoon? Sina Finance reporter Xu Wen (“X” for short) interviewed Yuan Yafei (“Y” for short) and unveiled the detailed M&A path.

The Offline Business will Never Disappear

X: Earlier this year Sanpower Group spent 500 million dollars buying Nanjing IFC from Li Ka-shing. Why have you made such a decision?

Y: IFC and Nanjing Cenbest’s Orient Department Store are separated by a wall. Once connected, the commercial area of the podium building will hopefully expand from 20,000 square metres to over 50,000 square metres, and the original simple rental return will turn into commercial sales return, thereby greatly adding to the value of the area. So to speak, this is for the development of the Group’s department stores.

X: This year’s retail industry can be, as it were, described as a chilly winter, but bucking this trend, Sanpower Group has initiated several high-profile M&As. What are the considerations behind this?

Y: All Sanpower’s M&As are based on industry and meant to better serve its main industry. I think the offline business will never disappear, and that the traditional offline business can also become the entrance to Internet companies. But the offline operation must be altered. In the past, China’s suppliers leasing model and point deduction management were severely criticised. Suppliers paid the (high) admission fee, and marked up the price of products before they offered any discount, which is no different from frauds. Unable to provide value to consumers, they are likely to be replaced by electronic businesses. Only by adapting to the development of the times will offline business be more valuable, and Sanpower Group’s acquisition of HOF, Lashou Network, etc., is intended for this core purpose.

X: The acquisition of British department store HOF has made Sanpower Group the first mainland buyer to enter the UK department store business. Will Sanpower harness the opportunity to expand its overseas markets?

Y: With a 165-year history, HOF boasts extensive experience in the department store industry and supply chain resources, as well as mature business model in private brands and buyers mode. The acquisition of HOF is exactly intended to endow Nanjing Cenbest with the neigong (meaning internal strength) in terms of private brands, buyers mode, and supply chains. If Nanjing Cenbest hopes to transform from joint operation leasing to merchandise services, it needs to learn from HOF’s managerial experience.

X: HOF was initially valuated at £600 million, but the final sale price stood at only £450 million, which made the local media assume that the corporate debt was in poor condition. Does Sanpower Group consider the deal a bargain?

Y: As a matter of fact, HOF was operating in good condition, with operating cash flow being positive. Last year HOF saw an approximate loss of £5 million, which was because during the European debt crisis, the major shareholder of HOF Icelandic banks had a high-interest debt with a rate of 9%. By the end of next February, Sanpower will help HOF convert its high-interest debt to a low-interest one with a rate of under 4.5% through refinancing, and hence achieve a net profit within the year.

Reasons behind the Acquisition of Lashou Network and Mecox Lane

X: The market is somewhat puzzled about Sanpower’s acquisition of the electronic business platforms Mecox Lane and Lashou Network, due to their lacklustre performance. Why did Sanpower Group dare to take them over?

Y: The strong supply chain capability of Sanpower’s offline business is exactly what is lacked by the group buying websites. In the future, Mecox Lane will focus on health and beauty products and M&As of peer companies, while Lashou Network will focus on O2O, in which the differentiated local life services will reinforce the users’ stickiness. (The two) anticipate a great potential in the capital market.

X: Currently the group buying sites are dominated by BAT (Baidu, Alibaba, Tencent). You’ve said that you want Lashou Network to become the first A-share listed company concerning group buying websites. Why are you so confident?

Y: Lashou Network’s competitive edge is its online and offline synergy. I have proposed the “Five Pull” synergic effect: the online pulls the offline, sales pulls delivery, supply chain pulls clients, entertainment pulls merchandise, group buying pulls customisation. Sanpower’s Hisap, Funtalk telecommunications, Nanjing Cenbest, Brookstone of the US and HOF of the UK will be the first to carry out online and offline collaborations with Lashou Network. We will be open-minded to introduce strategic investors and strategic partners, have Lashou Network cooperate with 3C of the whole society, department stores and other offline retail and service businesses, so as to ultimately forge Lashou Network into the world’s largest independent third-party O2O platform.

X: How will Sanpower Group differentiate online and offline commodities after unifying their prices? How to address the problem of “wrestling with yourself”?

Y: For standardised commodities, we shall clear the leftovers through online channels. For non-standardised commodities like luxuries, we shall not readily sell them on the Internet; instead, we mainly consider pre-sale (hot collections from stars) and C2B mass customisation such as Xiaomi mode.

A Portfolio of Fine Resources will See a Rise in Market Value in Three years

X: Seen From the outside, Sanpower Group’s purchase price is fairly generous. How to handle the problem of the shortage of funds?

Y: Sanpower Group has been adhering to a steady working style with good condition of assets. The subsidiary Nanjing Cenbest used its own cash and part of the loan to purchase HOF, and prior to that Cenbest had never raised any mortgage on assets.

X: Sanpower Group aspires to build a listed company platform worth 80 billion yuan, and now its two A-share listed companies’ total market value stands at 10 billion yuan. How long will it take to realise this goal?

Y: Currently, the market value of Sanpower Group’s two listed companies is somewhere near 13.5 billion yuan, of which Hiteker represents approximately 7.5 billion and Nanjing Cenbest about 6 billion. Since its acquisition and delivery of HOF in the end of August, Nanjing Cenbest has seen its market value ratchet up by more than 40%, whereas Hiteker up by nearly 30% over the same period, manifesting that our M&As had brought value rise to shareholders. (Because) First, our M&As have relevance; for example, HOF’s private brands and buyers mode. Second, predictability, such as Xuzhou Third People’s Hospital, Natali, which accord with China’s future industrial development. Third, price advantage. Our final transaction price has been the minimum in the industry. Sanpower Group is now holding a portfolio of fine resources, and I believe that its market value will scale up with the continuous injection of capital and the constant emerging of operating achievements. Predictably in the next three years up till 2017, there will be an intensive growth in our market value.

X: What is the strategic path of Sanpower Group’s healthcare industry? Will the relevant companies pursue a separate listing in the future?

Y: Healthcare is an industry with high growth potential in the years to come. The future development of the medical and health industry are bound to harness the power of the capital markets, and whether the companies will be listed alone or utilise the existing platform of the listed company depends on the capital market’s views of these objects and different modes’ promotion of business development. We do not rule out the use of the existing listing platform to advance the developing mode of “double main industry”.