Death Knell for Zhonghong

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As I write this, I’m awaiting word from the Chinese authorities on whether or not Zhonghong Holdings will be the first company to be delisted from a Chinese exchange for trading under 1 yuan for over a month. At today’s exchange rate, 1 yuan is aproximately 14 US cents. Zhonghong Holdings holds the exclusive license to develop SeaWorld branded parks and entertainment centers in China, Macao, Hong Kong, and Taiwan,

Meanwhile, a development just as big is taking place. China Securities Journal reports that Zhonghong Holdings’ 33 billion yuan of unpaid loans are being auctioned off. At today’s exchange rate, that’s US$4,762,890,000. According to the report, buyers are less interested in taking on the debt, so much as there are in acquiring the collateral – the Zhonghong Building in Beijing.

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Now the SeaWorld shares owned by Zhonghong Zhuoye are safe from what’s happening to Zhonghong Holdings – kind of. And I’ll get to that in moment.

First though, some quick background. As I’ve mentioned before, Zhonghong Zhuoye and Zhonghong Holdings are two different companies. Zhonghong Holdings is a publicly traded real estate development company. Zhonghong Zhuoye is the private investment company that owns a sizable stake each of  Zhonghong Holdings and SeaWorld Entertainment. So technically, they’re different companies and this is where things get tricky.

When looking at Zhonghong Holdings’ attempts at expansion, one thing becomes evident: it wanted to be like its competitor, Fosun.

Fosun co-founded and funded the film and television company Studio 8, after which Zhonghong Holdings entered into a partnership to try and acquire DreamWorks Animation.

Fosun partnered with Fortress Investment Group to develop senior housing in China. Then Zhonghong attempted to purchase Brookdale Senior Living in the US. It could not secure the financing and ended the attempt. After which, Fosun invested in Brookdale.

Fosun bought Club Med, Zhonghong followed by buying luxury travel company Abercrombie and Kent.

Most importantly, a year before Fosun opened its Atlantis Sanya resort in Hainan, a co-venture with Kerzner International, Zhonghong Zhuoye paid 33% above market to purchase Blackstone’s remaining shares in SeaWorld. As part of the deal, Zhonghong Holdings got the license rights for China.

Now there is a victim in all this – and that’s SeaWorld Entertainment. The company had nothing to do with the Zhonghong Holdings situation. It didn’t determine who bought the stock – that was Blackstone. And as for the rather lucrative shareholder and licensing agreements that were signed – David D’Alessandro was the Chairman of the Board at the time the agreements were formulated, and he was a Blackstone appointee. In fact, he had been appointed Chairman of SeaWorld’s Board in 2010, when the company was 100% owned by Blackstone. If you consider Blackstone and Zhonghong to be a rock and a hard place, then SeaWorld was indeed between a rock and hard place.

By all indications, Zhonghong Zhuoye’s not doing so good either. A good portion of its assets are tied up in Zhonghong Holdings and were frozen by the courts. A year ago, the auction house Christie’s sued Zhonghong Zhuoye’s owner Wang Yonghong for HK$120 million (US$15,357,600 based on the exchange rate of Sept 25, 2017) for the amount due on a Chinese vase won at auction.

With Zhonghong Holdings not being in a position to build SeaWorld parks, those contracts will likely be dissolved. And without the contracts in China, Wang most likely will want to increase his equity, and that’s done through the sale of his shares in SeaWorld.

But wait! There’s more!

Because Zhonghong’s tale is the gift that keeps on giving.

To finance the purchase of that 21% of SeaWorld stock, Zhonghong took out two external loans.

The first wasn’t technically a loan. Zhonghong Zhuoye issued 10,000,000 Class B preferred shares of Sun Wise UK to China Huarong Investment for $100,000,000. Sun Wise is the dummy company Zhonghong Zhuoye created to purchase the SeaWorld stock.

So why does China Huarong matter?

Meet Lai Xiaomin.

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He was arrested yesterday after a lengthy investigation by Chinese authorities. Charges include bribery and his firm dolling out billions of dollars in loans to companies they allegedly knew were unable to repay. His corruption trial is expected to be the biggest yet in modern Chinese history.

Lai Xiaomin was the Chairman of China Huarong at the time the SeaWorld shares were purchased.

And continuing….

PAG (formerly Pacific Alliance Group) loaned an additional $150,000,000 for the purchase. I highly suspect that Zhonghong Zhuoye, if it has not yet, will default on a loan payment to PAG. Around the middle of August, colleagues of mine in China began telling me to look for something happening between Zhonghong  and PAG (though they weren’t sure if it was Zhonghong Holdings, which has had business dealings in the past with PAG, or Zhonghong Zhouye). About the same time, a mysterious page appeared on the SeaWorld Entertainment website, only to be taken down the same day:

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A few days ago, I posted on the ThemedReality Facebook page that I had been informed by reliable sources that Six Flags was in talks to purchase all or part of SeaWorld Entertainment (click on the Disclaimer tab above for my policy on anonymous sources. A similar disclaimer appears on the Facebook page). The one line post was picked up by national news (I guess the elections and Jeff Sessions resigning weren’t important enough) and there were quite a few naysayers, which I’m comfortable with, since I advocate free speech.

Now, I have no reason to doubt my sources. At the same time, I understand the reasoning behind those that do doubt the statement.

If you look at the statement of Six Flags and SeaWorld strictly as a domestic transaction, it makes little sense.

But it does make sense if it’s part of a global strategy.

Tier 1 parks are a growth market in China. The biggest submarket of those are marine life parks – places like Atlantis Sanya, Chimelong Zhuhai, and Shanghai Haichang Ocean Park, which is opening next week.

In Hainan alone, which is now a visa free tourist zone for visitors from more than 50 countries,  we can expect eight to ten large scale aquariums and marine life parks within the next decade on an island the size of the US state of Maryland.

The 2017 AECOM/TEA Theme Index gives us an idea of how many people visited the two flagship SeaWorld parks last year: 3,962,000 in Orlando and 3,100,000 in San Diego. During the same period, 5 million people visited Hong Kong’s Ocean Park, while 9,780,000 visited Chimelong Ocean Kingdom in Zhuhai, up 15.5% from the year before.

Without a doubt, the world’s most well known marine life park brand is SeaWorld. Whoever has control of the SeaWorld brand in China stands to make significantly more than they would off the SeaWorld branded parks in the states. Owning a significant amount of shares in SeaWorld makes it easier to secure those licensing rights.

Six Flags talking with SeaWorld? It’s about much more than Six Flags Tampa Bay.

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SeaWorld, Zhonghong, and What China Wants

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On Friday March 24, it was announced that Blackstone will sell its 21% ownership of SeaWorld Entertainment to China’s Zhonghong Group for $23.00 per share, a markup of more than 30% over market value on the day of the announcement.  Zhonghong can purchase additional shares, buying up to 24.9%, and even own 30% or higher with board approval.

So who is Zhonghong?

Zhonghong is a real estate investment firm based in Beijing and founded in 1995.  In 2010, the company hired American themed entertainment design firm Thinkwell Group to develop a large-scale Monkey Kingdom theme park, based on the famed Journey to the West folklore story. Monkey Kingdom was scheduled to open in 2014 in Huairou, Beijing, but was put on hold due to a number of factors, among them a temporary ban enacted in late 2011 on the construction of new theme parks throughout China and a later re-zoning of Beijing that allows only one amusement park per district.  According to Chinese media, Monkey Kingdom is back on track to open, but in a new location – Jinan, Shangdong, about five hours to the south from its original location.  It is slated to open in 2020.

Zhonghong’s largest shareholder is Qilu Securities Shanghai Assets Management (QSSAM), which owns 20.5%. Other Zhonghong owners include a number of international hedge funds and institutional investors, many connected with or owned by the Chinese government. QSSAM is an affiliate company of Zhongtai (China and Thailand) Securities, which is controlled by Laiwu Iron & Steel Group, a government-owned steel manufacturing and distribution company. This should not be surprising, as every business in China, by law, is partially owned by a government-related entity.

Without discussing the complexities of international business law, the Chinese government will soon be a part-owner of SeaWorld Entertainment.

Now, this certainly isn’t the first time the Chinese have purchased an American entertainment company.  Dalian-Wanda Group, which just backed out of a deal to purchase Dick Clark Productions, owns AMC Entertainment, North America’s largest cinema chain. Wanda, which is one of China’s leading leisure companies, has also committed billions of dollars to new theme park projects in India and France.

But what does this mean for SeaWorld?  Well, one thing’s for certain – a lot of work is coming for the company’s Deep Blue Creative design studio and its partners, at least overseas.  But other than that, it’s time to put on the speculation hat:

CHINA WANTS PUBLICITY

Chinese multinationals often invest heavily in foreign companies or provide infrastructure services (such as rail, dams, sewage) to other countries as an example of the country’s economic might. A Chinese-owned SeaWorld Entertainment could see huge economic investment in the US parks, allowing the theme park company to finally be on a competitive level with Disney and Universal. Duplication of attractions in the US and China could provide similar attractions for different audiences on different continents, reducing design and production costs. How much investment are we looking at here? In 2011, it was announced that Monkey Kingdom would cost around US$1.5 billion.  That’s US$150 million more than SeaWorld’s entire revenue for its 11 parks and other corporate ventures during all of 2016. And I’m not adjusting for inflation.

CHINA WANTS REAL ESTATE

SeaWorld could sell of its US properties and exit its San Diego lease, segueing into a company that develops and operates parks in Asia and the Middle East, where the political climate is friendlier to animal-based entertainment companies. Under this scenario, those animals not restricted to export by the Endangered Species Act, along with the company’s coasters, would be shipped overseas.

The Orlando park is still beset by reduced attendance from Brazil.  Although a number of park critics have questioned this factor as just being an excuse to hide from the reality of fewer people wanting to attend the parks, state tourism figures issued by the State of Florida do show reduced visitation across the state from Latin America, along with lower hotel occupancy for 2016.

Over the weekend, I had a conversation with a number of San Diego hoteliers. One was willing to speak on the record, but requested anonymity. As I have not confirmed her statement through other channels, please consider it as opinion and with some skepticism:

There’s been a bit of confusion in the market since SeaWorld announced that One Ocean closed.  Most of our guests think the park doesn’t have orcas any more. Some ask our staff if they were shipped to Orlando. It doesn’t help that SeaWorld until just recently stopped calling them killer whales. So now, when one of our guests comes up to the desk and asks if they still have killer whales, we tell them they still have the orcas, and they say ‘No, I didn’t ask about orcas. I asked about killer whales.’ What I do know for certain is that more and more of our guests are avoiding SeaWorld because they think the orcas are gone.

San Antonio appears to be the one SeaWorld-branded park where attendance is stabilizing.  It, along with Orlando, are two properties the company owns outright, which either could be sold for a huge profit or developed. Don’t forget – Zhonghong also develops housing.

CHINA WANTS ORCAS

Two companies in China currently have orcas. There are nine at Chimelong Ocean Kingdom in Zhuhai and six at Haichang Ocean Park’s Linyi (Tiger Beach) Polar Ocean Park. Some of the Haichang orcas are scheduled to relocate to the Goddard Group-designed Shanghai Polar Ocean World when it is complete.  Other companies have announced plans to exhibit orcas in new or existing parks. None of the fifteen orcas have been on public display.

Chinese companies obtained their orcas through Russia’s TINRO Center, a quasi-government fisheries institute headquartered in Vladivostok.  Earlier this month, the head of TINRO was arrested and charged with the illegal capture and export of belugas and orcas to China. Although the arrest is tied in with a major initiative to increase offshore drilling in the Sea of Okhotsk, where the orcas are captured, it also creates a hardship for Chinese parks, as it dries up their only source.

Currently, the only state SeaWorld operates in with a prohibition on the export of orcas is California. The prohibition was signed into law on September 13, 2013 as part of the state budget. Violating the prohibition on breeding or export in California is a misdemeanor offense and carries a maximum fine of US$100,000, not a big fee for a company spending US$429 million on SeaWorld stock.

Representative Adam Schiff, who you can see nightly on the news dealing with one sort of catastrophe or another, introduced HR 1584 last week, which would amend the Marine Mammal Protection Act (MMPA) to prohibit on a national level the import or export of orcas for public display, along with breeding. Violations under the MMPA are treated much stronger than those under the California law and could lead to felony convictions and jail time. The Schiff bill presents a time constraint issue for exporting orcas.

So, under this third scenario, the parks remain in the US, along with heavy investment in the American parks, and only the orcas are removed.

Yet questions remain – what about SeaWorld’s commitment not to breed orcas at any of its parks, including international locations?

Company policy changes – often in only a few months. In December, SeaWorld was preparing to take the California Coastal Commission to court over a permit ruling that would have banned orca breeding at the park. Three months later, the company’s new CEO Joel Manby announced a voluntary end to the practice, one that to some may have appeared to be animal welfare driven, but by all accounts, was fiscally based.

Yet, the company’s stock value (under US$20 for quite some time), attendance, and profits continue to drop. If they continue to fail to increase, especially with new ownership on board, we likely could see yet another management change at SeaWorld. And often, with new management, policies change.

As Zhonghong acquires 1/5 of SeaWorld Entertainment, along with its two seats on the Board of Directors, we’ll get an indication of how much control the company wants to exert on its American acquisition. What will happen with the relationship Manby established with the Humane Society of the United States, an organization often critical of Chinese policies?  What will happen to the American parks, including the two Busch Gardens parks?  What future lies in store for the animals?

If SeaWorld’s animals are relocated to China, there’s one single line in Chinese law to keep in mind. In the United States, animals within theme parks are private property.  Even that large talking mouse.

Allow me to introduce you to Article 3 of the Wildlife Protection Law of the People’s Republic of China, as revised in 2016:

Wildlife resources shall be owned by the state.

Yes, you read that correctly. If SeaWorld sends its animals to China, they will be owned by the Chinese government.

And it all kind of makes sense, because when Blackstone’s sale goes through, the Chinese government will be an owner of SeaWorld as well.