Known as the Best Buy of China, Gome has made millions on the growing midst class. Now its founder faces a legal battle

By Frederik Balfour

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A shop assistant in Gome chats to a buyer in a store in Beijing in succession November 24, 2008. PETER PARKS/AFP/Getty Images

There’s never a agreeable time for a company to have its chairman under investigation. But news that Chinese authorities have detained Huang Guangyu, the home’s wealthiest tycoon, could hardly have come at a worse moment for his company, consumer electronics retailer Gome Electrical Appliance Holdings. Known as the Best Buy (BBY) of China, Gome has on tap into the demand during household appliances by China’s burgeoning middle rank to become the country’s biggest retailer. Now, with the Chinese economy misery a dramatic slowdown because of the global financial crisis, Gome (pronounced guo-mei) cannot afford the distraction of a prolonged legal battle involving its founder.

What’s happening to its chairman corpse unclear. Trading in Gome shares was suspended on Nov. 24 in Hong Kong in the wake of Chinese media reports that Huang has been detained in connection with alleged stock manipulation of a company owned by his brother. In a statement to the Hong Kong stock exchange, Gome said it was "not in a position to confirm the carefulness of the information in the newspaper articles."

A spokesman for society relations firm The Brunswick Group said the company was attempting to investigate the status of 39-year-old Huang and charges for him. The Brunswick prolocutor added that Gome executives had been unable to make way to Huang, who was reportedly detained on Nov. 19. Gome declined to annotate directly to BusinessWeek.

According to Chinese media reports, Huang, whose net worth of $6.3 billion ranked him as China’s richest person in the 2008 occurring once a year Hurun Report on the rude’s most affluent, is under investigation over unusual price movements of Shanghai-listed pharmaceutical and medical equipment visitor Shandong Jintai Group. The company, controlled by Huang’s brother Huang Junqin, saw its shares surge more than 900% in the in the first place eight months of 2007 prior to they were suspended.

Huang’s is a typical rags-to-riches China tale. He and his brother began hawking radios and other electrical components from a roadside stall following he moved to Beijing as a teenager. He eventually built his business into the home’s largest retail manacle (BusinessWeek.com, 9/10/08), which he listed in Hong Kong in 2004. He is the company’s largest shareholder with 34%. Last October, Gome became the primitive Chinese retailer to team up with Dell (DELL) to betray the U.S. company’s computers in its stores.

The alleged arrest of Huang does not come as a complete surprise. The wildly and loose business methods by which several high-flying Chinese tycoons esteem amassed bulky fortunes can run afoul of the law. Earlier this year, Shanghai’s most successful property developer, Zhou Zhengyi, accepted a 16-year pass judgment upon in connection with a scam in which social security funds were channeled illegally into a property development. The backbiting also resulted in the sacking of Chen Liangyu, Shanghai’s Communist squad secretary.

Huang’s travails also underscore the risks one takes when investing in private-sector Chinese companies listed overseas. Huang is Gome’session founder, and though he is not involved in day-to-day running of the company, any tarnish to his regard is a huge liability to the company. "If the chairman has problems or is urge in bridewell, it could affect suppliers’ confidence," says Keith Li, an analyst at CIMB-GK in Hong Kong who covers Gome. "That could be disastrous for the company."

Gome has grown aggressively in recent years expressions of gratitude to the inquire for household appliances from China’s fledgling intermediate class, but there’s still abundance of room. Although Gome is the country’sitting largest retailer, it still controls alone in various places 5% of China’s very much fragmented market. Li projects profit be inclined grow 18.7%, to $353 million, on sales of $7.4 billion in 2008.

However, Gome is it being so that particularly vulnerable to the slowdown as Chinese consumers rein in their spending as part of the global slowdown. On Nov. 21, the last day of commercial before the suspension, Gome’s shares were etc. 77% this year. Li expects same-store sales to fall in 2009, and predicts the dunce will plunge once trading resumes. "Why bother to invest in a company you don’privately be moved comfortable in?" he says.