China's sputtering economy has spooked some foreign investors into fleeing, but not the Philippines' richest man, Henry Sy: He's ramping up plans to build more malls in China.
Mr. Sy, a retail-to-banking tycoon who made his fortune in the Philippines after leaving China almost 80 years ago, is doubling down on his bet on China's consumer class. His conglomerate, SM Investments Corp., plans to open three malls in China by 2017, to add to the six it already has. One of the new projects, in the northeastern city of Tianjin, will be the world's largest free-standing mall when it opens next year.
SM has decided to target China as its only foreign investment destination even as domestic rivals Ayala Corp. and San Miguel Corp. focus more on opportunities within Southeast Asia. Mr. Sy's family-run company believes it knows how to tap into China's burgeoning middle class, and is chasing higher returns offered by its malls there compared with the Philippines, where SM dominates the retail landscape.
SM is a minnow compared with some of its Chinese competitors. Its 2014 group sales were $7.7 billion, a fraction of the $39.1 billion posted by China's property and retail giant, Dalian Wanda Co. Yet, while billionaire Wang Jianlin's Wanda is shuttering stores amid weak consumer confidence, SM will spend about $450 million a year to build new malls in second-tier Chinese cities.
The expansion is a homecoming of sorts for the SM patriarch, who in the 1930s left Fujian for Manila to join his father, who already had a business in the city. He later set up a shoe store that he parlayed into a nationwide chain of Shoe Marts before also moving into banking and real estate.
Teresita Sy-Coson, the daughter of Mr. Sy, says sentiment isn't driving the China strategy.
"We're in China more for business reasons than for emotional reasons," she said. "But we do have a Chinese background, and we understand the culture. In China, like the Philippines, we see this emerging middle class enjoying the same things—dining out, buying things their new income can buy them."
In emerging markets such as China, middle-class spending remains resilient, while the luxury segment is more susceptible to boom and bust, said Ms. Sy-Coson, who started out as a 12-year-old cashier in what was then her father's lone shoe store. Now 65 years old, she runs SM's retail and banking operations.
"We're not selling luxury—if we were, we'd have been badly affected," by the slowing economy, Ms. Sy-Coson said.
SM adopts a different strategy in China than it does in the Philippines, where SM acts as both retailer and landlord. In China, it serves only as the landlord, leasing out all available floor space, lowering the margin for error when operating overseas. The numbers back up this approach: SM's Chinese malls deliver a 15% annual rate of return versus 12% in the Philippines, according to company figures.
There is still room for expansion in the Philippines, but with a population of about 100 million it is a far smaller market than China's 1.3 billion people. And a less affluent one, too: Chinese GDP per capita was $7,594 last year, according to the World Bank, compared with $2,871 in the Philippines.
SM is already an established high-street powerhouse at home: its armory of 54 Philippine malls is expected to almost double to more than 100 by 2020.
SM initially adopted a cautious approach to China after Beijing in the 1990s encouraged successful Chinese expatriates to invest there. The company opened five malls between 2001 and 2012 in second-tier cities.
They opened a sixth this year, in the inland city of Zibo, with the three in the pipeline targeting the eastern cities of Tianjin, Changzhou and Yangzhou. Each will stick to the middle-class, second-tier city formula, Ms. Sy-Coson said.
That approach should insulate SM from China's broader economic slowdown, hitting the most mature markets such as Beijing and Shanghai, according to Bruno Lannes, a Shanghai-based partner for consultancy Bain & Co. A recent survey of about 1,200 Chinese by consulting firm McKinsey found Chinese consumers are largely optimistic about the economy and its future direction.
China is experiencing "a correction," said Ms. Sy-Coson. "But it isn't bad—in our market, anyway. People are still buying."