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The Shoeshine Column: Is Yan the man to save Richina Pacific?

Friday 23rd June 2000

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Few people have his depth and breadth of contacts but he needs profits in New Zealand to fund his Chinese ambitions

Richina Pacific chief executive Richard Yan is an interesting fellow. His philosophies haven't been reported much here but with the share price bumping along the floorboards shareholders need to get to know them.

Yan turned up on the corporate scene in 1995 when a consortium of investors headed by his Richina (short for Rich China) Group took a controlling interest in construction group Mainzeal, but it wasn't his first visit to New Zealand.

He initially arrived here in 1980, aged 17, with a borrowed $US26 and a Rotary scholarship enabling him to study at the University of Auckland.

He was, according to interviews, the first student to leave China after the 1978 change of regime.

He grew up during the cultural revolution in a single-room flat in the northern city of Tianjin. He says his schooling in China was a waste of time - in the afternoons the children made envelopes.

His family appears to have had its ups and downs but has managed to keep a foot on either side of the fence. His great great grandfather was minister of education in the Kuomintang regime overthrown by Mao's communists in 1949 but his grandfather was a friend of the late premier Zhou Enlai.

He arrived in Auckland with only the most essential trappings of Western civilisation - a watch, some clothes and a Playboy-brand belt. After graduating from the university with a BA and BCom in 1985 he worked in Australia for Westpac, which sent him on a scholarship to Harvard Business School.

From there he worked for Bankers Trust in New York and Hong Kong but his mind was on the business opportunities to be found in China.

He set up Richina Group and used his Harvard contacts to raise $US53 million for venture capital projects in China.

Quite why he was attracted to Mainzeal is a mystery. Neither the builder nor its majority-owned Mair Astley leather and venison outfit had any interests in China.

Yan's vision is to build Richina Group into a pan-China corporation with a global brand name. But it will be focused on the Chinese market - the rest of the world will deliver finance, technology and know-how.

Since Yan bought in, Mainzeal/Mair Astley - renamed Richina Pacific - has been enlisted to establish the joint venture Shanghai Richina Leather tannery and to build and operate the Blue Zoo aquarium in Beijing. It has also seen profits collapse and the share price, riding at 270c in early 1997, fall to a recent low of 36c.

That can't really be laid at Yan's door. The $28.8 million loss in 1998 included operating losses of $7 million spread pretty evenly around the group except venison. Unallocated overheads, interest and losses from discontinued businesses took a further $17.8 million and the group paid $4 million in taxes.

Last year, freed from unprofitable New Zealand operations, the company lost a mere $3.8 million. This year it looks set to return to the black.

By how much remains to be seen but it's unlikely to be much of a return on the company's $254 million of assets.

It would help if the Wellington Mobil on the Park building was sold. Anything near the $65 million book value would wipe out the $60 million of term debt and save $9.4 million a year of interest.

That's unlikely this year. Commercial property is well out of favour and any sale would probably be at a chunky discount, hitting profits for the third year running.

The recovery will be down mostly to New Zealand construction, venison and leather, which last year accounted for 62% of group assets and 89% of revenue.

But as Yan notes the local businesses are mature and operate in a very competitive market. The future, he says, is in China.

Yan has described this as "an environment with a non-convertible currency, minimal legal recourse, immature capital markets, high rates of inflation, widespread corruption, social unrest and a constantly shifting regulatory environment."

Sound like the investor's dream? Yan, like many a foreign multinational, thinks so, describing China as "the land of unlimited growth potential."

The standard rationale says China has 1.2 billion people, so if I can get just 1% of the market, that's 12.4 million consumers. But after a few years trying the reality of making money in the environment Yan describes is beginning to dawn on the multinationals and many are considering cutting their losses.

To date Richina Pacific's Chinese operations have been no exception.

Beijing now has three aquaria, prompting one to wonder whether the Chinese like looking at fish all that much. Richina Pacific's is losing money and the company's plans to build aquaria elsewhere have been put on hold. The leather tannery also lost money last year. It blamed this on a mild US winter cutting demand for shoes, which suggests its profitability model is pretty fragile.

Yan plans more China ventures for Richina Pacific. He reckons he knows how to breach the system's walls and extract some profits.

And if anyone can do that he probably can. Few people have his depth and breadth of contacts both in China and in the west. He made it on to Fortune magazine's recent list of 100 business leaders for the new century.

For investors who still buy the China story long term, Yan's wagon may be as good as any to hitch on to.In the meantime he still has the problem of trying to generate enough profit out of the mature New Zealand businesses to fund his China ambitions. A sceptical market is unlikely to drive the share price up until it sees some runs on the board.

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