×

China's Dalian Wanda prepares for the end of urbanization

China Construction of America has successfully bid for state-level and municipal projects in the United  States, such as the $407 million Alexander Hamilton Bridge rehabilitation, seen here.
Source: China Construction America
China Construction of America has successfully bid for state-level and municipal projects in the United States, such as the $407 million Alexander Hamilton Bridge rehabilitation, seen here.

The billionaire behind shopping mall developer Dalian Wanda says China's era of rapid urbanization will end within a decade, so he is speeding up his company's shift toward tourism and entertainment after a $3.7 billion initial public offering.

Wang Jianlin became China's fourth-richest man in part by following the migration of 300 million people into cities. His Dalian Wanda Commercial Properties, which debuts on the Hong Kong stock exchange on Dec. 23, owns 159 Wanda Plaza shopping centers across 109 Chinese cities, including 88 projects under construction.

"The industry has to seize the last 10 years to transform," Wang told a business summit in Beijing on Saturday. "Once the urbanization rate hits around 70 percent, urbanization will be basically completed. Then there may be no more chances."

About 54 percent of China's 1.4 billion people now live in cities, and Beijing has set a target of 60 percent by 2020. City dwellers earn and spend more, which is critical as China shifts to consumption-led growth instead of manufacturing.

Read MoreChina's top five macro themes next year: HSBC

Wang's view is more bearish than some of his property industry peers who see the benefits of urbanization lasting longer. Yu Liang, president of China's biggest residential developer,China Vanke, said in May that the "golden era" was over although migration to cities would boost the industry for another 15 years.

The number of people moving to cities has slowed to 17 or 18 million annually, down from 20 million at the peak, said Tang Wang, a China economist at UBS in Hong Kong. A big obstacle for workers wanting to move to cities from the countryside is that the government restricts the number of people who can obtain "hukou" residency benefits such as affordable housing and schooling in metropolitan areas.

"It's not really about people going to the city but people staying in the city," Tang said.

In the boom years, Dalian Wanda opened malls primarily in fast-growing provincial cities instead of focusing on Shanghai and Beijing. Close ties with local governments helped Wang obtain cheap land for malls, and he expanded quickly.

Read MoreChina HSBC PMI contracts in December, raising growth concerns

Dubbed "Nouveau Riche Plaza" by netizens, Wanda Plazas - which typically house a cinema, children's arcade, karaoke bar and hypermarket - are dominated by premium local and mid-tier international fashion brands.

A 27 percent drop in first-half 2014 revenue illustrates why Dalian Wanda is keen to change course now. The company blamed fewer project completions and lower selling prices, a symptom of China's weakening property market.

"This path (of rapid expansion) cannot be sustained," Wang said. "China's land resources, China's fiscal resources and China's markets won't be able to support it."

Beverly Hills

In the hope of luring more middle-class consumers, Dalian Wanda is investing 325 billion yuan ($53 billion) in upscale entertainment and tourist-focused facilities, including mega projects called Wanda Cities, to be opened in the next few years.

"This pioneering design emphasizes the concept of culture and tourism and aims to place Wanda Cities among tourist destinations by offering a wide range of entertainment and retail services," Dalian Wanda said in its IPO prospectus.

Read MoreChina has 'wasted' $6.8 trillion in investment, warn Beijing researchers

It has spent over 135 billion yuan on cultural resorts in tourist destinations such as Changbai Mountain, Yunnan and Hainan. It will open its new show theater and movie theme park in the central city of Wuhan on Saturday.

It's also speeding up expansion overseas to dilute the impact from China's slowest economic growth in 24 years, with plans to build more than 150 luxury hotels globally by 2018.

Earlier this year, the company bought land in Beverly Hills, California, and agreed to jointly develop a hotel, residential and commercial project near Chicago's Millennium Park.

Read MoreChina trade data paints dreary picture of economy

However, Dalian Wanda's IPO price shows investors are wary over the outlook for China's commercial property sector and uncertain about the company's diversified model. The company initially hoped to raise as much as $6 billion but cut the offering because of lukewarm interest from investors.

"Wanda needs new growth momentum, but overall demand is weak," said Geng Chen, a Philips Research analyst based in Shanghai.

The IPO values Dalian Wanda at 8.6 times 2015 earnings forecasts, which puts it higher with mixed-used property company China Resources Land, and residential property giant China Vanke, at 7.5 times.