The ongoing crisis facing the mainland financial group D'Long Inc offers a sharp contrast between what should be done and is yet to be done, and what is overdone in the mainland market. The company's biggest mistake may be that is has been too narrowly focused on the making of tomato sauce rather than doing more to embrace the dawn of the dining-out era in mainland cities.

And like other free-market economies, such imbalances can actually represent a delicious business opportunity for other players in the market - those that are able to recognize it as such - and may be an opportunity for Hong Kong investors.

The D'Long crisis is unlikely to die down within the next two weeks. It is a financial group - a group that specializes in moving money about the stock market - and one that buys companies to enlarge the pool of assets under its control.

The troubles it is facing have affected the A-Share market for the last few days. And rumours about its financial woes have been doing the rounds in Beijing since before the start of the year. But as the Chinese saying goes, "a dead camel is still larger than a horse". D'Long, as one of the largest mainland companies controlled by private investors - and certainly the largest of its kind - may only find salvation through a large sell-off of its assets. There are pluses to this - it claimed more than 1 billion yuan in net profit in each of the last few years - however this may still not be enough to save it. Even for market watchers who have been following the crisis unfold, D'Long's present form, both in terms of its size and its complicated multi-level holding structure, may come as a shock - not only is the company a struggling behemoth, it also suffers from poor management. Its ultimate undoing may be its overly-complicated mutual-financing structure, set up by people with little or no training in financial management, and also with little concern for minority investors' long-term interests. There is also a lack of synergy among a number of publicly-listed companies under its umbrella which do not appear to share any mutual support.

What, one may ask, can there be in common between 177 subsidiaries that produce a wide variety of goods ranging from tomato sauce, apricot jam, electrical tools and auto parts? Very little, it appears. In fact, little work seems to have been been done to build up the value chain between these companies. Despite the fact that many of them are subsidiaries generating healthy sales, the group has never leveraged its assets effectively.

The management team, which is headed by the five Tang brothers from Xinjiang Autonomous Region, blames its so-called "industrial integration" programme for its present troubles. Investors and business partners have been hard put to see what kind of integration there can be amongst the production of tomato sauce, apricot jam, electrical tools and auto parts.

There may not be much likelihood of a sympathetic audience willing to wait for D'Long to complete its bizarre integration efforts. Early forecasts are that the company will have to scale down some of its larger operations and undergo major changes in management in order to win back its appeal in the mainland market. The Tang brothers won't be able to garner much compassion unless they restructure the group's top management by letting some professionals take charge.

If there is anything that can be learned from this, it is that even domestic heavyweights are not immune from danger. At the moment, D'Long is far from doing profitable business in many of its units. Tomato sauce and apricot jam are by no means major items in the Chinese diet, and have little chance of claiming a significant market share either in either the domestic food market or overseas.

In comparison, its restaurant chain has done well - generating 24.5 billion yuan sales in 2003 - a year when their business was almost wiped out during the outbreak of SARS. According to the latest figures released by the National Statistical Bureau, revenue from this sector was up by 26.4 per cent over the previous year.

In a year where there has not been a major disease or outbreak to trouble the industry, 2004 is expected to register some mild inflation and restaurant chains are poised to earn higher revenues.

At the moment, there are 236 restaurant chains in the mainland, which together operate some 5,451 outlets and franchise outlets. Around 50.5 per cent of these - along with 49.5 per cent of total sales - have been launched by overseas investors.

And surprisingly, it is Beijing, rather than Shanghai or Guangzhou, that is the real centre for this growth. In 2003, it took a share of nearly 20 per cent of the national restaurant chain industry. A negative side to this is that its residents also lay dubious claim to having the mainland's highest level of obesity.

Given this remarkable growth, it is hard to understand why major Hong Kong chains like Cafe de Coral and Spaghetti House are still absent on Beijing's streets. They are to be found in some southern cities, but in the northern cities, where people are more willing to dine out, Hong Kong businesses have been slow to make inroads.

Nowadays, the Hong Kong-style cafeteria is catching on in Beijing, attracting more and more white-collar workers who are willing to put down money for set lunches with iced lemon tea. There are many such establishments in the city's various office towers, but not many of them are restaurant chains.

If Hong Kong, which is famed for its catering businesses, fails to capture a larger share of the mainland restaurant market, in the face of such opportunities, it can only be because of a lack of confidence in its own abilities. But what is there to be afraid of? After all, according to NSB figures, State-sector firms account for less than 5 per cent of the mainland restaurant-chain market - and there are no protective regulations being imposed on this sector. Nothing stands in Hong Kong's way.

(HK Edition 06/18/2004 page16)