Legend Holdings shows diversification isn’t always a winning formula

The investment holding company warned it will post a large loss for 2023, as losses from some assets may outweigh declining profits at others

Key Takeaways:

• Legend Holdings warned that it would post a net loss of up to 4 billion yuan for 2023, in a major negative swing from its 1.17 billion yuan profit in the previous year
• Its listed subsidiaries posted revenue and profit declines in the first nine months of 2023, while its losses from investments in startups may have widened

By Warren Yang

Investment holding company Legend Holdings Corp. (3396.HK) is showing that the whole isn’t always greater than the sum of its parts, at least in the business world.

The company owns a diversified portfolio of investments, including its longtime holding in Lenovo (0992.HK), the world’s largest PC maker, which helps to reduce its risk of overexposure to any single sector. But the company as a whole can sometimes fare far worse than some of its star performers, which apparently was the case last year.

Last Friday, Legend warned that it expects to post a net loss of as much as 4 billion yuan ($557 million) for 2023, which would be a massive reversal from its 1.17 billion yuan profit the previous year. The company attributed the swing to “market and industry factors against the backdrop of the slowdown in the global economy” and “the unfavorable impact of the market environment,” which dealt a blow to its portfolio businesses.

In addition to Lenovo, Legend owns controlling stakes in Levima Advanced Materials (003022.SZ) and Joyvio Food (300268.SZ), both listed in Shenzhen, as well as unlisted Banque Internationale à Luxembourg, the oldest private bank in Luxembourg. It classifies those investments as “industrial operations.” In its “industrial incubations and investments” segment, the company also runs funds that invest in startups and hold minority stakes in a number of companies, some of those listed.

While Legend has a wide range of holdings, the lion’s share of its earnings still come from Lenovo, one of its oldest holdings. In the first half of last year, the computer maker accounted for more than 88% of the company’s total revenue and about 38% of the net profit from its industrial operations, according to Legend’s interim report for the six months. Its industrial incubations and investments division lost money.

As the industrial incubations and investments division lost money, Legend’s overall revenue fell in the first half of last year, and its net profit tumbled nearly 70%. But things must have gone drastically bad during the final six months of the year for the company to plunge so deeply into the red. A calculation using company data shows its net loss in the second half ballooned to as much as 4.67 billion yuan from a loss of 961 million yuan a year earlier.

Third-quarter results reported by Legend’s three listed investments provide some clues about why the second-half loss jumped so much, although they also leave questions.

All three posted declines in earnings, but Joyvio Food, one of the largest seafood companies in China, stands out for its deteriorating performance. Its revenue fell by a relatively modest 12.8% year-on-year in the nine months to last September. But it swung to a net loss of 652 million yuan attributable to Legend’s shareholders from a profit of 87 million yuan a year earlier. Last month, the company said it expects to report a net loss of up to 1.3 billion yuan for all 2023, showing its business deteriorated sharply in the fourth quarter, hit by a drop in salmon prices and rising feed costs.

Food businesses

Legend has other food businesses, including fruit, that it bundles together with Jiyvio Food under Joyvio Group. Those other businesses were profitable enough for this whole group of food units to continue to turn a profit in the first half of last year. Joyvio Group made a net profit of 239 million yuan for the six months, even as Joyvio Food reported a net loss of 376 million yuan for the period. So simple math suggests that the non-seafood businesses must have earned a profit of some 615 million to offset the loss from Joyvio Food.

Levima, which supplies advanced materials, also posted an 80% year-on-year profit decline to 125.6 million yuan in the first nine months of last year, vastly outpacing a 23% fall in its revenue. But it did remain in the black.

Legend’s bellwether Lenovo investment is facing slowing revenue growth as well, but also continues to make profits. Banque Internationale à Luxembourg, on the other hand, is the most profitable among Legend’s investments, making the largest net profit with the smallest revenue base in the first half of last year. So that’s unlikely the source of the company’s deep losses.

So, the struggling seafood unit aside, the biggest contributor to the sharp increase in losses in the second half of last year be widening losses in the industrial incubations and investments division. In the first half of last year, those losses ballooned to 405 million yuan from just 3 million yuan a year earlier.

As things stand now, investors may be better off putting their money in Legend’s profitable publicly listed companies rather than into the group itself. Lenovo shares have gained about 29% in the past year, while Legend’s stock is down 22% over that time, including a 3.5% slide in the two days after it issued the latest warning. Lenovo also offers a five-year average dividend yield of 4.7%, superior to Legend’s 3.7%.

Among Legend’s other investments, Levima, despite falling in value in the past year, still trades at a trailing price-to-earnings (P/E) ratio of more than 48, compared to just 6.4 for Legend, showing investors like the company far more than its parent.

A conglomerate is often valued at a discount to the sum of its parts to take into account the difficulty of managing diverse businesses as effectively as a smaller, more focused pool of companies. Legend’s latest profit warning is a fresh reminder of this risk.

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