Zong Tops China Billionaires as Communist-to-Capitalist

Hangzhou Wahaha Group Chairman With Daughter Kelly Zong
Zong Qinghou says daughter Kelly Zong will take over Wahaha when he retires. Photographer: Imaginechina/AP

Twenty-five years ago, when Zong Qinghou was 42, he made his living selling soft drinks and popsicles to schoolchildren. He says he earned about $8 a month -- less than a third of China’s average wage at the time -- and was so broke that he once slept in a tunnel under the streets of Beijing rather than spend on a hotel.

Today, Zong, 67, is still selling soda -- and lots of other things -- as the wealthiest man in mainland China, Bloomberg Markets magazine reports in its December cover package, “The World’s Richest People.” His net worth of $20.1 billion as of Oct. 5 ranks him No. 30 in the world, according to the Bloomberg Billionaires Index. Supermarkets stock the juice, soda and bottled water his Hangzhou Wahaha Group Co. produces, and doting Chinese parents buy his baby formula and children’s clothes. In all of Asia, only Hong Kong property developers Li Ka-shing and Lee Shau-kee and Indian industrialist Mukesh Ambani are richer.

Even in a country that has exploded in wealth and created a new economic ruling class, Zong’s story stands out. His rags-to-riches tale is remarkable not just for its trajectory but for the way he has thrived amid China’s seemingly impossible conflation of capitalism and communism.

Zong, who didn’t attend high school, lived on a farm commune from 1964 to 1978 during Mao Zedong’s Cultural Revolution. He read the Communist revolutionary’s books on leadership and learned about enduring through struggle. After Deng Xiaoping, the architect of China’s drive toward a market economy, came to power, Zong took over a grocery store in 1987 with two retired teachers and a $22,000 loan from relatives.

Frugal and Autocratic

Now Wahaha’s chairman, Zong remains a frugal and autocratic manager, traits he honed in approving his first shop’s every expense, down to the purchase of a broom. He often sleeps in a sixth-floor office at Wahaha’s gray headquarters in Hangzhou, the capital of Zhejiang province. For lunch, he heads downstairs to the canteen, furnished with formica tables, where he eats the same food as his workers.

“When you are poor, you’ll have to think of ways to be better off,” says Zong, recalling his early years while chain-smoking Davidoff cigarettes outside Beijing’s News Plaza Hotel. “That experience helps me to endure.”

People passing the five-star hotel a few blocks from Tiananmen Square don’t give the nation’s top billionaire a second glance. He certainly doesn’t advertise his wealth. He’s dressed in a dark jacket and slacks and plain black shoes, all made in China. He says he bought the footwear only after someone told him his old pair was wearing out.

Swiss Watch

He has no bodyguards; his only escort is the manager of Wahaha’s Beijing operations.

“I don’t need expensive clothing,” he says.

Zong’s sole nod to his status is his $48,000 Vacheron Constantin watch, which he bought in Switzerland to replace an old Rolex.

“Other people say Rolex is for the newly rich,” he says, smiling.

Zong is prospering amid China’s booming economy and burgeoning middle class. In the past three decades, growth has averaged 10.1 percent a year, lifting hundreds of millions out of poverty.

Wahaha, which means laughing baby in Mandarin, attracts these new consumers. Flavored, nutritionally enhanced milk caters to families with young kids, while mineral water and iced green teas target adults.

’Juicy Milk’

“Our juicy milk was a big hit,” Zong says, of his drink that combines juice and milk.

Wahaha generated $11 billion in sales last year, with a 7.2 percent share of China’s soft drink market. It’s No. 3, behind Coca-Cola Co. and Hong Kong-listed Tingyi (Cayman Islands) Holding Corp., according to London-based Euromonitor International Plc. Zong estimates that earnings at his closely held Wahaha will soar 60 percent to $1.6 billion this year from $1 billion in 2011.

Such a surge would make Zong even richer. He and his wife, Shi Youzhen, and their daughter, Kelly Zong, hold about 80 percent of the company. Zong disclosed the stake to Bloomberg News in September, more than doubling previous estimates of his wealth. (The Bloomberg Billionaires Index operates under the rule that billionaire fortunes are inherently family fortunes.)

Zong’s net worth is based on the average enterprise value-to-sales and price-to-earnings multiples of three publicly traded peers, using Wahaha’s profits, plus $1.9 billion in cash from estimated dividends, market performance and taxes.

Raising Profile

Zong is likely to use his status as China’s richest person to pursue acquisitions overseas, says Zhang Lu, an analyst at Capital Securities Corp.

“Given the fact that Wahaha is already a well-known brand domestically, disclosing his share and wealth would help to boost the global profile of both Wahaha and Zong himself,” she says.

Zong joins four other mainland Chinese billionaires in Bloomberg’s list of the world’s 200 richest people. Wang Jianlin, 58, chairman of property developer Dalian Wanda Group, is the second wealthiest, with a net worth of $9.1 billion as of Oct. 5. Baidu Inc. Chairman and Chief Executive Officer Robin Li, co-founder of the nation’s biggest search engine, is third, with $8.4 billion. Ma Huateng, 41, of Tencent Holdings Ltd., the country’s largest Internet company by market value, is fourth, with $7 billion. Longfor Properties Co.’s Wu Yajun, 48, the Beijing-based developer who’s the richest woman in China, is worth $6.4 billion and is fifth.

Elder Billionaire

Zong, older than these moguls, was born in 1945, a pivotal year in modern Chinese history. World War II had just ended and the nation was convulsed by civil war among Mao’s Communists, Chiang Kai-Shek’s Nationalist Party and independent military armies led by regional warlords. Zong’s grandfather worked for a warlord, which later hurt the family’s status after the Communists took over in 1949.

In the late 1950s, Mao ordered 700 million people into a state-controlled worker program dubbed the Great Leap Forward. By the early 1960s, the Great Leap had failed, leading to the deadliest famine in history, according to Jung Chang and Jon Halliday’s 2005 book, “Mao: The Unknown Story.”

In the mid-1960s, Zong, like millions of young Chinese, was forced to join a farming commune before Mao launched his second campaign, the Cultural Revolution.

“For a long time, I couldn’t even afford food and clothing,” Zong says of his years on the farm. “I climbed from the very bottom of the society.”

Deng’s Reforms

Zong’s time on the commune ended only after Mao died in 1976 and China gradually adopted the more-liberal policies engineered by Deng. Zong went to work as a salesman for consumer-goods companies as the country suffered shortages in the staples Chinese were clamoring for: meat, bicycles and TVs.

One of the companies Zong sold for was a beverage maker that ran a shop owned by a grade school in Hangzhou. He and two retired teachers took over the store in 1987, the first step in creating Wahaha. Zong bought ads on China Central Television and in state-owned newspapers.

“In some small towns, Wahaha became a well-known brand within two weeks after the first commercial,” he says.

Zong made a profit of $15,991 that first year, about 50 times the gross national income per capita in China at the time. He spent the next two and a half decades expanding from China’s cities to rural areas, where disposable income was accelerating and competition was less fierce.

Successor Selected

Zong named daughter Kelly to head Wahaha’s nascent international business in 2010. So far, that includes small exports to South Korea and the U.K. Kelly, who holds a bachelor’s degree in business from Pepperdine University in Malibu, California, says she’s working with investment banks to find food and beverage deals in Europe and Australia. She also runs a third of Wahaha’s 60 factories in China. Zong says she’ll take over when he retires, although he has no plans to do so.

Now that he’s a billionaire, Zong says, he wants to help other Chinese prosper.

“People who get rich early should help the rest get rich,” he says, referring to words attributed to Deng.

Zong has been a delegate to the National People’s Congress, China’s highest legislative body, for nine years. He says he has talked about private enterprise playing a greater role in the economy with the country’s probable next leader, Vice President Xi Jinping.

Xi will likely take over from Hu Jintao as president next year. Zong has proposed to lawmakers that private companies be permitted to open banks and be exempt from taxes if they extend credit to small businesses. Xi may be a kindred spirit, Zong says.

Private Enterprise

“Xi believes private enterprise is the main direction of economic development,” Zong says. “He experienced hardships when he was young and working in the countryside, which gives him a profound understanding of the lower class and ordinary people.”

Zong is optimistic that policy makers are on the right track, even though China’s economy has slowed for seven straight quarters as of the end of September. Premier Wen Jiabao, in office until March 2013, wants to boost domestic consumption-- playing into Zong’s vision for Wahaha.

“It isn’t realistic to drive the economy by exports or investment” Zong says. “The biggest hurdle facing China’s economy now is that the government’s income is too high and the people’s income is too low.”

As China transformed itself into the world’s second-largest economy, Zong never considered he’d wind up as his country’s richest person.

“I just swore I’d have a decent factory one day,” he says. “My wealth has been accumulated one yuan at a time.”

* * *

How We Crunched the Numbers

In calculating a billionaire’s net worth, we valued his or her stakes in publicly traded companies using closing prices of Oct. 5. Valuations of foreign assets were converted to U.S. dollars.

Closely held companies were valued in several ways. We compared the average enterprise value-to-sales; enterprise value-to-earnings before interest, taxes, depreciation and amortization; price-to-book value; or price-to-earnings multiples of similar publicly traded companies. Comparables were chosen based on the closely held company’s industry, size and location. Estimates of company debt were based on the average net debt-to-Ebitda multiple of peers.

Liquidity Discount

A liquidity discount of 5 percent was applied to most closely held companies where assets might be hard to sell. Higher liquidity discounts were given to companies for which the structures were more complex. No liquidity discounts were used in calculating public stakes. In some instances, we also applied a country risk discount based on a person’s concentration of assets.

We usually valued real estate by applying average regional occupancy and capitalization rates to the square footage of closely held commercial properties. For personal property, we used its appraisal value. Land was valued using the market price per acre.

Estimates for art, furniture and jewelry were based on their insured value and expert assessments. Yachts, planes and other vehicles were assessed based on market value. Net worth estimates include dividend income, proceeds from asset sales and real estate.

In cases where most of a fortune comes from closely held companies, estimated dividends are calculated only if historical financial information is available.

Tax Calculations

We deducted taxes based on personal income, dividend and capital gains rates in a billionaire’s country of residence. Taxes were applied at the highest rate unless there was evidence to support a lower percentage. For estimates of cash and other invested assets, we applied a hybrid market return based on holdings in cash, government bonds, equities and commodities.

We attempted to identify and confirm all potential liabilities. No assumptions were made about personal debt. Family members often hold a portion of the billionaire’s assets. Such transfers don’t change the nature of who ultimately controls the fortune. We operate under the rule that all billionaire fortunes are inherently family fortunes.

Each billionaire or his or her representative has been given an opportunity to respond to questions regarding the net worth estimate. Bloomberg News editorial policy is to not cover Bloomberg LP. As a result, Michael Bloomberg, the founder and majority owner of Bloomberg LP, wasn’t considered for this ranking.

— With assistance by Michael Wei

Before it's here, it's on the Bloomberg Terminal. LEARN MORE