Chinese Billionaires Invest In Football: Is It Worth It?

Some of China’s richest people, like Alibaba ’s Jack Ma, LeEco’s Jia Yueting and Wanda’s Wang Jianlin, are entering the sports market, but will it pay off?

The billionaires are purchasing sports broadcasters and football teams, both at home and abroad, seeking to quickly build up their brands in the sports industry – which the government wants to reach 5 trillion yuan ($800 billion) and account for 1% of China’s GDP from 0.6%.

Perhaps the most noticeable deals are billionaire Wang Jianlin’s $52 million purchase of a 20% stake in Spanish football club Atletico Madrid and China Media Capital (CMC)’s $400 million purchase of a 13% stake in City Football Group, which owns England’s Manchester City and the U.S.’s New York City FC. CMC’s Li Ruigang will also join the group’s board.

What’s more, Chinese investors are willing to pay record breaking transfer fees to tap top European premier leagues players to join their clubs. On Wednesday, the Alibaba-backed Evergrande Taobao signed up Atletico Madrid’s Jackson Martinez for 42 million euros ($46 million).

They are investing abroad to help bring professionals, such as sports management experts and coaches, to China and facilitate youth training overseas, where there’s better training facilities than in the developing country. Plus, asset prices in Europe are at attractive levels, given the region’s economic woes, says Beijing-based fund manager who oversees a sports investment fund.

Investors’ enthusiasm has already pumped asset prices to record levels. CMC in October paid an eye-popping $1.3 billion for the exclusive broadcast rights over the next five years for the Chinese Super League, outbidding a group of competitors which included state broadcaster CCTV. The price is sky high, given that the television rights for the 2015 season only fetched 50 million yuan ($7.6 million).

“If you told me a few years ago that someone would spend this much for the broadcast rights for the Chinese Super League, I’d think you were kidding me,” says a Beijing-based investment professional who declined to be named. “But there is still premium to be made from such expensive prices.”

Profits will be elusive in the near future, as whatever advertising and subscription payment they collect will not be able to cover the huge purchasing costs, industry professionals say. For a country of China’s size, its professional sports market is relatively small. Consultancy PwC estimated in 2011 that total revenues from ticketing, merchandise and advertising in China would reach $3.4bn this year, compared with $63.6bn in the U.S.

That is taking a toll on Guangzhou Evergrande Taobao, the football team Alibaba invested $192 million in 2014 for a 50% stake. The team reported a loss of 517 million yuan ($78.5 million) in the first half of 2015, as they didn’t generate enough from advertising and ticket sales to cover its rising operating costs.

Making a quick buck in the actual football game might not be possible for now. However, profits are not a priority for LeEco’s sports unit Le Sports, the company’s Chief Executive Lei Zhenjian said in a recent interview. Le Sports is focusing on products and services, and it is in advanced talks to raise 3 billion yuan($460 million) in a new fundraising round, he said. It was valued at $451 million last year.

The companies are still exploring how to use their sports assets. Money might be made from sports tourism and online sports betting, or guiding users to its more profitable business platforms, said the aforementioned Beijing-based investment professional.

The central government is encouraging private investors to build fitness facilities and provide related services, as it seeks to reform a sports sector fixated with winning Olympic gold medals and has seen little public participation in recreational sports. China’s President Xi Jinping, an avid football fan himself, has made Vice Premier Liu Yandong in charge of a “leading small group” to oversee progress in football, which has become a national joke due to its ineptitude and past match-fixing and bribery scandals.

The Ministry of Education is building 20,000 football schools by 2017 and aims to increase that number to 50,000 by 2025. “The social image of sports has been greatly improved,” said the sports investment fund manager. “It used to be viewed as a useless hobby and few people would accept a professional football career. But now people are gradually seeing it as a positive part of life.”

Another opportunity lies in emerging sports, such as marathon or non-professional football league, as they remain undervalued, says Ken Xu, a partner at Shanghai-based venture capital Gobi Partners. “Even though football hasn’t really took off, money has been going into this for a while,” he says. “So football is not really cheap anyway. But there are a lot of emerging sports and there is still a lot of money to be made from those.”

By YUE WANG Feb. 4, 2016 in Forbes

Read more here