China Vanke’s shareholder register has been marked by many exits and entrances over the past few years and on Monday, the group welcomed a new set of players after a major institutional investor (believed to be Blackrock) took advantage of a share price bounce to offload its entire investment.
The HK$2.1 billion ($268 million) block trade was undoubtedly timed to get ahead of a large and possibly protracted series of divestments by the insurance group Baoneng, which now holds a 25.4% stake in Vanke worth Rmb 66.94 billion ($9.84 billion) based on Monday’s closing price in Shanghai.
Privately held Baoneng is currently subject to a lock-up, which expires on July 19 and analysts believe Vanke’s shares will come under pressure until the overhang is resolved.
They also believe Baoneng will begin the divestment process fairly swiftly since it is under capital pressure after the country’s insurance regulator banned it from selling universal life insurance products last December in punishment for its acquisitive tendencies towards companies like Vanke.
If and when Baoneng sells its stake, it will represent the denouement of a failed hostile takeover, which has illuminated the Chinese government’s difficulties in loosening its control over the economy and allowing market forces to fully play out.
For Vanke represents a company which has flipped the government’s plans for more mixed ownership on its head.
China’s second largest property developer by sales (as of the first half of 2017) pioneered mixed ownership long before it became the government’s defining economic model. Founder Wang Shi never took a major stake and Vanke has also long been run along professional management lines, according it a premium valuation over its peers.
But the company’s fragmented shareholder base made it an attractive takeover target for a group like Baoneng, which upset the insurance regulator by creating a potential asset-liability mismatch after selling high-yielding insurance products to fund a hostile bid for Vanke in December 2015.
Vanke’s saviour has been Shenzhen Metro Group (SMG). But the company’s white knight has put it under government control, given SMG is wholly owned by the Shenzhen State-owned Assets Supervision and Administration Commission (SASAC).
In January, Shenzhen Metro started to gain control after purchasing a 15.3% stake held by Vanke’s original largest shareholder, China Resources, for Rmb37 billion.
In June, it then took out Evergrande, which had also jumped onto the M&A bandwagon in the hope of making a quick buck. As analysts have reported, China’s third largest property developer by sales (as of the first half of 2017) ended up crystallising a Rmb7 billion loss on its 14.07% stake, which it sold for Rmb29.2 billion.
Baoneng break-even point
Citic Securities has previously calculated the break-even point for Baoneng’s investment at Rmb16.50 per share. This means that even though it failed to gain control of Vanke, it could still end up making a financial gain based on Monday’s Rmb24.42 A-share closing price.
The long running saga concerning Vanke’s ownership has also underlined just how difficult it can be for foreign shareholders to understand the shifting sands of political allegiances in China and how that affects some of its largest corporate entities.
In this instance, bankers said 40 investors purchased the 92 million share block trade, with about 50% of the deal allocated to the top five accounts.
The deal had been marketed at a 1.5% to 4% discount to Friday’s close, before being priced by lead manager Citi at a 3.2% discount. It represented about 7% of Vanke’s outstanding share capital and roughly 15.7 days average daily trading volume.
On Monday, the shares traded down 3.6% to HK$22.7. At this level, the stock is trading just a shade below the sector’s average forward 8 times p/e and at a 19.8% discount to net asset value (NAV) compared to a market average 17%.
Bankers said many of the new accounts did not flip the deal, having been attracted by the fact that Vanke’s shares are cum dividend (the stock is currently yielding about 4%).
Gitic sale
The undisclosed seller jumped into the market after Vanke’s shares rose to a 52-week high when the stock resumed trading on July 7. It had been suspended pending details of an asset transfer agreement to purchase the property portfolio of Guangdong International Trust & Investment Corp (Gitic), which became the first non-bank financial institution to go bankrupt in 1999.
Timing was also dictated by a number of positive target share price revisions. Lead manager, Citi, for example, has a target price of HK$30, which it raised from HK$27.55 on July 3.
The US investment bank cited the successful election of Vanke’s new board and SMG’s pledge to allow the company to operate independently.
It also flagged the Gitic sale, which has been valued at Rmb55.1 billion ($8.3 billion) and comprises 16 prime land parcels across Guangzhou.
The acquisition not only demonstrates that Vanke’s operations are returning to normal following the protracted takeover battle, but also the consolidation taking place in the Chinese property sector. However, the valuation is complicated by components of Gitic’s debt restructuring, which have yet to be disclosed.
In a statement to the Shenzhen Stock Exchange, Vanke said it hopes to minimize the “historical issues” between Gitic and regulators, creditors and individual property owners. “The transaction involves some complicated issues, which may impact the use of land and the operations of the property unit of Gitic in the future,” Vanke said.
In a research report, JP Morgan estimated 2% net asset valuation accretion from the portfolio, which has an average cost of Rmb26,000 per square metre (psm). Other recent projects in the area have fetched up to Rmb50,000 psm.
But analysts believe the portfolio may take some time to be digested, which means investors now have to unpick a potentially new business model. One of the reasons Vanke has always traded at a premium to the sector is because its rapid asset turnover generated high returns on equity.
Moody’s analyst Kaven Tsang told FinanceAsia that it considers the Gitic acquisition as: “credit positive because the acquired land parcels are mainly located in the core districts of Guangzhou, and will strengthen Vanke's market position and land bank in the first-tier city.”
But Tsang also added that: “We note that as they are legacy assets, they will take some more time to develop.”
Standard & Poor’s Cindy Huang also commented that: “The end of the boardroom battle and a successful transition from the Wang Shi-led era is credit positive in terms of stability of the company.”
It’s worth noting that Vanke will seek to fund the land purchase through strategic partners, presumably in equities,” Huang stated. “I think they’ll seek different options, which could take up to 10 years to complete."
According to Huang’s estimate, Vanke’s debt-to-Ebitda ratio will rise from 2.6 times in 2016 to three times over the next 12 months.
