By staff reporter Chen Qian and intern reporter Xiao Hua

From Caijing Online

A larger share of China’s leading appliance retailer Gome (HKSE: 493), whose chairman is under investigation for alleged financial crimes, may be sold to foreign investors to shore up the company’s cash flow in a shaky market.

Contacted by Caijing, Gome spokesperson He Yangqing declined comment but did not deny a December 16 report in The Financial Times that said the company “held preliminary talks with several foreign investors over the possible stake sale.”

Chang Sun, a senior executive at private equity fund Warburg Pincus Asia, which held a Gome stake until 2007, reportedly would play a key role in the talks.

Government analyst Lu Renbo, an official at the Development Research Center of the State Council, China’s cabinet, told Caijing that Gome could glean experience in advanced management techniques from foreign investors that buy stakes. In addition, he said, a share sale could ease the retailer’s capital pressure.

Lu said the nationwide retail chain is currently having a hard time obtaining short-term credit from suppliers.

In addition, Gome has had trouble securing bank financing ever since police arrested the company’s founder and chairman, Huang Guangyu, on charges of illegal stock trading in November. A subsequent management shuffle and company assurances of “business as usual” have failed to the restore confidence in the firm, which owes banks tens of billions of yuan.

Huang controls 36 percent of the company. Foreign stakeholders include U.S. financial giants JP Morgan and Morgan Stanley, which own 8.88 percent and 8.17 percent, respectively.

Lu said a Gome plan to sell stakes could be hindered by Huang, who as majority stakeholder apparently would have to approve any deal. Moreover, Guosen Securities analyst Hu Hongke noted, Huang’s assets have been frozen as part of the criminal probe.

Gome’s plight has shaken some suppliers of the chain’s more than 1,000 stores, which sell a range of goods from washing machines to televisions. A Caijing source at Skyworth, an electronics supplier, expressed concern over Gome’s solvency. And some suppliers are now asking the retailer to pay for goods before delivery, Caijing learned.

According to a Haitong Securities report, sales in Gome’s hometown market Beijing have slumped since October. Some suppliers have suspended deliveries of popular products.

The report said a reckless expansion spree during the past few years strained the company’s finances, and the market is concerned about its 4.6 billion yuan in convertible bonds due in 2010.

Nevertheless, Gome’s third quarter 2008 financial report included some good news: Sales revenue rose 20 percent compared to the first nine months of 2007, to 36.4 billion yuan.

Lu said now may be a good time for foreign investors seeking a share in China’s retail market to buy Gome stock, whose price has been falling. Nevertheless, risks remain because of uncertainty surrounding Huang and the company’s future.

1 yuan = 14 U.S. cents