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Was Tsinghua Unigroup's bond default a surprise?

Chipmaker's strategic significance 'overrated' -- but its parent is different

Bailing out Tsinghua Unigroup is probably not a priority for the government of President Xi Jinping, an analyst says. (Nikkei montage/AP and Reuters)

HONG KONG -- Arguably the hottest topic in China at the moment is corporate bond defaults. Recent developments in the country seem to carry more significance than just a certain number of companies being unable to fulfill their repayment obligations on time, as the list includes notable state-owned enterprises that were deemed to be strategically important against the backdrop of an ongoing tech rivalry with the U.S.

A case in point is Tsinghua Unigroup, a tech conglomerate under the umbrella of Tsinghua University, the top Beijing school for science and engineering and the alma mater of President Xi Jinping. A default on a 1.3 billion yuan ($198 million) bond on Nov. 15 by the chipmaker was a powerful wake-up call to investors on China's corporate credit risks.

But a close look at the recent financial reports on Unigroup and its parent, Tsinghua Holdings, a fully owned investment arm of the university, gives us a different picture on how precarious their positions were prior to the default.

Before moving on, it may sound a bit counterintuitive to many outside China for a country's top university to run various businesses and raise funds through a financial market. This is, however, quite common in China, as universities had to find their own funding sources to financially support themselves.

Tsinghua University is a leading example of a university operating many companies, similar to its rival Peking University. Since Tsinghua Holdings' inception in 1992, it has grown into a conglomerate with total consolidated assets of 477.5 billion yuan as of June. Its sheer size is roughly comparable to notable big corporations in the region, such as Japan's mobile operator NTT Docomo and South Korea's Samsung Fire and Marine Insurance.

Despite its size, the company has shown various symptoms of inefficiency. In a midyear review document issued for bondholders at the end of August, Tsinghua Holdings' management warned that the capital-to-asset ratio, which had been below 30% since 2018, could have "a certain influence on debt repayment capability and normal operation of the company." 

A rising level of liabilities -- which correlates to a low level of capital adequacy -- was recognized by the company to be "too high" and could cause liquidity issues "once we encounter troubles in refinancing and credit extensions," the management said in the risk factor disclosure.

The high level of liabilities is a result of aggressive acquisitions over the past years, and goodwill -- a total amount of premium paid beyond acquired companies' net worth -- was at 61.42 billion yuan at the end of June. The company expressed wariness over the risks of this goodwill being impaired when "acquired companies face substantial changes intheir external business environment or from their mismanagement."

The acquisitions were made predominantly by Tsinghua Unigroup, which is 51% owned by its parent. It is certainly the core subsidiary, as over 60% of the parent's total assets and about 70% of its revenue are derived from it.

Unigoup Chairman Zhao Weiguo, dubbed an "acquisition maniac" by mainland media, has splashed out cash for everything from chip manufacturing to mobile communications, smart devices and electric vehicles. Consequently, the subsidiary's goodwill is 52.17 billion yuan, or 85% of the whole group's, and the number of consolidated subsidiaries amounts to 286 companies.

The direct scar of these acquisitions on Unigroup's balance sheet is clearly marked in the level of interest-bearing debts, which stood at 156.69 billion yuan as of June, and over half of them reach redemption within a year. "If the company's operation deteriorates or refinancing channels diminish, bond repayments could be negatively affected," the company stated in its disclosure to bondholders in August, seemingly giving advance notice on its default in November.

What seems noteworthy is the company's sense of insecurity displayed in the same document. In the part discussing policy risks, the company said it may "not be sufficiently able to capture the strategic opportunity of industry development" in semiconductors and could "settle in a backward position" if its competitiveness could not be maintained. Even though Unigroup has been a major beneficiary of lucrative subsidies from various levels of governments over the years, it spelled out the risk of the potential reduction of that.

"The strategic importance of Tsinghua Unigroup is definitely overrated," James Shi, distressed debt analyst at Reorg Research, told Nikkei Asia. With the exception of Yangtze Memory Technology, its Wuhan-based memory chip maker, Shi believes Unigroup's competitiveness is not that significant. "Even though they make chips, they are not state-of-the-art chips, and what they make does not solve China's problem in the semiconductor industry," he said.

Alex Payette, the founder and CEO at Cercius Group, also doubts Unigroup's strategic value, more from a political perspective. The Montreal-based research and consulting firm, which analyzes Chinese companies' political connections with the Communist Party and the state, understands that Unigroup's Chairman Zhao is a "personal friend" of Hu Haifeng, the son of former top party and state leader Hu Jintao. As Zhao is not exactly in a correct political position under the current regime, Payette presumes that bailing out Unigroup "is likely not a priority right now" for the government under Xi. Besides, the remaining 49% of Unigroup is held by Beijing Jiankun Investment Group, a company controlled by Zhao.

However, Payette considers that the reasoning in the evaluation of Unigroup should not be applied for Tsinghua Holdings, as it is the core of Tsinghua University, where Xi's close aides are starting to form a "New Tsinghua Gang." The holding company, as a main vehicle, "probably would not be allowed to fail," the Canadian scholar and entrepreneur wrote in a reply to Nikkei Asia.

Whatever the future outcome may be, the current debt issue has given us clues on where these ostensibly important Chinese companies stand.

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