The Magic Touch: Chinese Soccer Club Going Public?

June 5th, 2014 was a landmark day for Chinese soccer. Jack Ma, the founder of China's largest e-commerce business, Alibaba Group, bought a 50% stake in Guangzhou Evergrande Soccer Club. Ma purchased the top Chinese club for 1.2 billion yuan ($192 million), and aimed to lead the club to new heights. Meanwhile, Jack Ma and Jiayin Xu, the chairman of Evergrande Real Estate Group, announced together that they would take the club public to raise capital by 40% and seek another 20 investors, each holding 2% share .

A Chinese soccer club preparing to go public? It's hard to imagine, given of the depressing state of Chinese soccer at the beginning of 21th century. Guangzhou Evergrande, however, has ascended with a stunning pace, winning all three domestic titles since 2011 and becoming the first Chinese club to take home the Asian club championship this past season.  For Guangzhou Evergrande, floating on the stock market now maybe seem plausible and tangible. Although this is perhaps the first time that a Chinese soccer club prepares to go public, in Europe, it is far less rare. Before making the final decision, Guangzhou Evergrande could learn a lot from the stories of other clubs: both the benefits, and the risks.

Jack Ma (right) and Jiayin Xu (left)

The first soccer club to float on the stock market was Tottenham Hotspur in 1983. In 1982, Irving Scholar, a property tycoon purchased the club. However, he found that the club was operated extremely inefficiently, with more than one million pounds debt left by his predecessor. Soon he figured out that there was only one way to solve this pressing problem. He established a holding company, with the soccer club as a subsidiary, and then floated the holding company on the London Stock Exchange (LSE). The initial public offering raised £3.3 million, which helped the club successfully tackle the debt problem.

Following Tottenham’s successful experiment in raising money through such a new way, (along with the rapid commercialization of the soccer industry) an increasing number of soccer clubs started to go public. By 2000, there were 22 English clubs listed on the London Stock Exchange, the Off-Exchange (OFEX), and the Alternative Investment Market. These offerings raised a total of £167 million , most of which was used to strengthen squads, renovate stadiums, improve liquidity to existing shareholders, and develop commercial operations.

Nevertheless, enthusiasm for investing in soccer clubs faded shortly. After the temporary success, most clubs delisted due to enormous fall of share prices. For instance, Sunderland soccer club originally went public in 1996, with an initial price of 585 pence. Astonishingly, when the club delisted in 2004, its share price had substantially plummeted to 31.4 pence, an epitome of the failure of soccer clubs to float on the stock market.

When it comes to the reasons why soccer clubs could hardly sustain a long term success on the stock market, we need to focus on the nature of soccer clubs: unpredictability.

First and foremost, in soccer industry, the performance of a club fluctuates greatly through a season and always cannot meet expectations from fans and investors. Therefore in many cases, the return is not proportional to the investment, and it is almost impossible for investors to guarantee the return of investing on soccer clubs.

For example, the let's discuss London-based club Queens Park Rangers (QPR). During the 2012-13 Premier League campaign, QPR spent more than £41 million on transfer fees, landing more than ten high-profile players, and saw their wage bill increase by almost £17 million to £68 million. However, rather than obtaining a substantial income based on its huge investment, at the end of the season, the club announced it made a loss of over £65 million and did not escape from relegation. Companies in non-soccer fields such as manufacturing enterprises, investors can precisely calculate the rate of return, gaining sufficient information to decide whether to invest it with little risk.

Secondly, even if a large amount of investment could improve the performance of a soccer club in a season, it is unlikely to ensure that the soccer club could sustain good form for a decade. It is possible that a franchise which was a favorite to the championship last year has to fight to avoid relegation this season. From investors’ perspective, stable and sustainable performance is preferred.

Additionally, some investors of a club’s stock are die-hard fans, who are eager to support the club. A club may find it difficult to attract investors who are not its supporters. Thus, the stock market of soccer clubs is a thin market, with few bid and ask offers, leaving more volatile stock prices.

So if Guangzhou Evergrande is steadfast in its belief to go public, it definitely needs to tackle these issues with its professional management team. If it is to reduce unpredictability of its stock price, it must develop steadily, and to make the investment-return ratio more measurable. Guangzhou Evergrande needs to emulate Manchester United, not only a survivor, but a victor in the cruel stock market.

With a strong base of fans around the globe, the most outstanding strategy Manchester United has been applying is business diversification. Man U significantly expanded its business fields, such as derivative products and new media, in a global context and therefore diversified its commercial operations. Thus even if the club cannot radically get rid of the unpredictability on the pitch, the performance off the pitch has become a relatively larger fragment of the overall operation. With many other stable and measurable channels beefing up the development in a long term, the Red Devils have diversified risk leading to better risk management.

If Guangzhou Evergrande can eventually go public and survive on the stock market in the future, it will start a new chapter in Chinese soccer industry. It is quite possible to obtain huge financial investment and develop to a better global. More critically, after converting to a joint stock company as a requirement to float on the stock market, the club will be pushed to enhance its management and make it more professional. That could positively influence all other Chinese clubs to pursue professionalism in managing sports, a key to reignite the country’s soccer hope.

The Magic Touch: Contract Controversy in Chinese Soccer

Three sides of this story (Guangzhou Evergrande club, Liu Jian and Qingdao Jonoon club)

During the past several months, a soccer player’s transfer case has been in the spotlight of Chinese soccer circles. This case involves three contracts, which unveil some loopholes of the Chinese soccer league.

The story began on January 3rd, 2014. On the morning of that day, Guangzhou Evergrande soccer club announced on its website that Liu Jian from Qingdao Jonoon soccer club had signed with Guangzhou Evergrande.

However, that night, Qingdao Jonoon stated that Liu Jian’s contract with the club wouldn’t end until 2017, thus, the club did not approve his transfer to Guangzhou Evergrande. As a result, the duration of the contract became an important issue.

All of a sudden, three contracts between Qingdao Jonoon and Liu Jian surfaced, and Liu Jian released details of two of them on his Weibo (the most popular social network similar to Twitter in China).



Guangzhou Evergrande announced the success of Liu Jian’s transfer

The first contract ended on Dec 31st, 2013. The second one expired on Jan 1st, 2014, which meant that Liu Jian would become a free player on that date if no clubs immediately signed him, which made it legal for him to join Guangzhou Evergrande.

Nevertheless, the third contract posted by Qingdao Jonoon shows that Liu Jian will still belong to Qingdao Jonoon until 2017. Therefore, Liu Jian couldn’t be transferred to another other club without permission from Qingdao Jonoon. Another astonishing aspect of the three contracts is that, the annual salaries increase so rapidly, with 800,000 RMB, 2,600,000 RMB and 3,500,000 RMB, respectively.

There is no doubt that one employee just has one official contract with his or her company during a period, so why did Liu Jian sign so many contracts with his club? While this case might seem unbelievable to people who are not familiar with Chinese soccer, this is in fact a common phenomenon in China.

According to a Chinese soccer commentator, there have been 46 similar cases of these multiple contract situations such as Liu Jian’s. Ten years ago, it was found that the salary of the so-called official contract of Shen Si, a former Chinese national soccer team member, was 2,000,000 lower than what his club actually offered. In 2009, several players of Tianjin soccer club collectively terminated training and left the club because of fabricated contracts.

In fact, in order to avoid paying a tax, many soccer clubs around the world sign more than one contract with players. However, Chinese clubs have a different reason for signing two or more contracts with players. The reasoning has to do with several policies that have been enacted by the Chinese soccer association that limits players’ salary and transfer fee. The latest policy even set an upper bound of one million RMB on a player’s annual wage.

All of these policies serve as responses to the strong public outcry that occured approximately a decade ago. Many people argued that soccer players were overpaid, claiming that the overall Chinese soccer players’ level and ability were not worthy of the salaries that they obtained. This group of people pressured the soccer association to limit the salaries of soccer players. As it turned out, the policies that resulted from this debacle went against market rules. The association not only failed to solve the problems, but also triggered a sequence of more complex issues.

Liu Jian’s transfer case is currently processing; we still do not know which one of these contracts is real. Meanwhile, Guangzhou Evergrande has already removed him from its squad list for next season. A panel composed of officials from the Chinese soccer association is still investigating this issue, as people are waiting for a reasonable judgment. If the panel fails to come up with a fair judgment, Liu Jian may not sign with either of these two clubs, and his career may become gloomy.

Although each country has a breadth of unique problems in its sports management system, all sports managers need to bear in mind that all sports policies should be in accordance with disciplines of the market, and perhaps more importantly, should adhere to the principles of the policies to protect players’ benefits.

The Magic Touch: The Success of Guangzhou Evergrande (Part II)

This is Part II of a two-part post on Chinese soccer club Guangzhou Evergrande.  To read Part I, click here.

Some people think that the success of big-spending football clubs is beneficial because it can bring immediate prosperity, while others believe that this pattern is not sustainable. However, people may cannot label this phenomenon good or bad since to a certain extent, the occurrence of these new operations in the sports industry is inevitable.
But in China, it is widely acknowledged that the success of Guangzhou Evergrande has brought much more benefits than harm to the stagnant Chinese soccer industry (and even to the nation as a whole). Most importantly, the success of Guangzhou Evergrande has rekindled Chinese belief in soccer. During the past ten years, Chinese soccer teams constantly went downhill and most fans became pessimistic of the future of Chinese soccer. Empty stands were common in matches of the Chinese Super League.

However, things have changed as mighty Guangzhou Evergrande reaches new milestones like winning the triple crown of three different cups in a single season. Before the final of AFC Champions League, all 40,000 tickets were sold out in three days. More surprisingly, many eager fans spent 3,000 yuan (nearly $500) buying tickets that were originally sold at 400 yuan (about $65). It was impossible to see these scenarios outside the stadium five years ago, and people believe this desire is the key to further development.

The sold-out Final

Furthermore, because of the enthusiasm and hope of soccer lovers, an increasing number of parents would like their children to play soccer and to become professional players. From a well-known Chinese reporter’s words, Ma Dexin, there are only 42 professional players in the U-15 Chinese national team now. But in the next several years, with the profound change in people’s attitudes, the talents pool and growing youth teams could solve the problem of insufficient numbers of young players.

 More importantly, in light of the success of Guangzhou Evergrande, an increasing amount of people and companies will be encouraged to invest in soccer industry because of its relative profitability. The effect of advertisement and the possibility of replicating Evergrande’s success could drive numerous firms and individuals into the space. Because of the professional-style management group at Evergrande, the club has managed to remain financially healthy despite the massive spending.  Its expected that the club will soon be very profitable.

We also need to strongly point out that because advertisement, the Evergrande group has greatly increased its turnover. Before it purchased the soccer club, its turnover was approximately 30.3 billion yuan (nearly $5 Billion) per year. In contrast, during the last year, the number has been increased to 92.3 billion yuan (over $15 Billion). In view of the bright and prosperous future of Chinese soccer industry, numerous companies may want to enter the market.

This is Part II of a two-part post on Chinese soccer club Guangzhou Evergrande.  To read Part I, click here.

The Magic Touch: The Success of Guangzhou Evergrande (Part I)

Guangzhou celebrating their Champions League Title

This is Part I of a two-part post on Chinese soccer club Guangzhou Evergrande.  To read Part II, click here.

On the night of November 9th , Guangzhou Evergrande of China won the AFC(Asian Football Confederation) Champions League by beating Seoul FC from Korea. This was the first time a Chinese soccer club won the continental tournament. My grandfather, a long-time soccer fan, described the moment as one of the greatest of his entire life.
Guangzhou Evergrande was originally founded in 1954. In 2010, after the Evergrande Real Estate Group purchased the club, this team won the championship of China's second division and was promoted to the Chinese Super League. A year later, the club claimed the league title in its first season in top flight (the same feat German club FC Kaiserslautern performed in 1998). Then during the next two years, the club furthered its success and the Guangzhou Evergrande era began.

Evergrande Real Estate Group deserves much of the credit for these achievements. Their transactions include signing  Dario Conca, MVP of the Brazilian Soccer League and Brazil national team player Elkeson, along with renowned manager Marcello Lippi. All told, Evergrande has spent more than three billion yuan (nearly $500 MM) during the past several years.

Magic with star player Dario Conca

The success of Guangzhou Evergrande is one example of a big-spending teams winning titles around the world. Ever since Russian magnate Roman Abramovich entered Stanford Bridge (home ground of English club Chelsea), operational patterns of professional soccer clubs have been changed. By pumping significant funds into the team and recruiting top-notch players and coaches, clubs can obtain excellent results almost immediately.

Russian Magnate and Chelsea owner Roman Abramovich 

Currently, Chelsea FC, Manchester City and Paris Saint-Germain lead this contingent of clubs built on wealth rather than proper management. The soccer world order was upset by new money and rule changes, leaving many traditional powers fragile. The most significant changes occurred as a result of the Bosman Ruling. The Bosman Ruling banned domestic league limits on the amount  foreign players a club could employ (as long as they were citizens of a European Union member nation). This opened up a rash of transfer spending and opened the door for big-pocket owners to flood the world's soccer scene.

This is Part I of a two-part post on Chinese soccer club Guangzhou Evergrande.  To read Part II, click here.