Vanke Vanquishes Baoneng with A Little Help from the State

Called a buy, more like a swap.  Behemoth developer China Vanke, HK 02202 is selling new shares of itself to a state-owned entity in exchange for equity which will effectively dilute Baoneng’s weighty ownership.  If you can’t fight, dilute!

Shortly after new investor Baoneng had acquired over 22% of China Vanke in 2015, making it the dominant shareholder, Vanke suspended both its A and H shares. The reason given was to prepare a restructure.  The only other major shareholder at that time, state-owned China Resources, held 15.29%.

Various news articles emerged regarding Vanke’s Chairman Wang Shi’s  distrust of the brothers Yao Zhenhua and Yao Jianhui at the helm of Baoneng, in terms of both its money sources via wealth management products and its experience in property development. The H shares in Vanke resumed trading on 1/6/16 while the A shares continued to be suspended as multiple announcements were made of promises of details to come.  Details finally emerged on 3/13/16 about a surprise MOU stating that Vanke would be buying a full or partial equity stake in a target company owned by state-owned Shenzhen Metro Group Co., SZMC.  The purchase is to be arranged mostly through the issuance of new shares of Vanke to SZMC.  On the same day Vanke released its earnings, which showed a nice jump of 32% although net profit to shareholders, thanks to a bigger portion to non-controlling interests, increased only 15%. It also raised the annual dividend from .50rmb to .72 rmb. Given the depressing state of real estate in China in all except the 4 top tier cities, this was a positive result and the stock climbed over 9% today to reach a market cap of 307.47 HKD (approx. $47 Billion US).

No value of the equity in SZMC was given, but the Vanke filing did state that the approach would make SZMC a “long-term important shareholder.”  Per Shenzhen Metro’s website, as of 12/14 it had assets of 156.7 Bill rmb (vs. Vanke’s 611.5 B rmb). SZMC also reported net assets of 70.7 B rmb for an asset/liability, of 54.9%.  It stated that it was pursuing the concept of “build metro, build city” and had started its first real estate project in 2013 of ShanHaijing: residences with views of water and hill.  Sales were “good”.  Property under construction at the end of Q1, 2014 was 700,000 sm, (Vanke delivered 20.6 million square meters in 2015.) The real estate group, Metro Group Development Branch, was established in 2007.

Per the MOU, SZMC intends to inject assets of certain premium property projects above various subway stations into the Target Company upon the signing of Formal Documents by both parties. Formal documents are expected March 15, 2016. There is still no announcement of A share resumption.

Golden Paradise, Golden Dream, Golden City and Joying Gold are among the many projects of Vanke where increased control by Baoneng will be rebuffed thanks to the new share sale to SZMC. Details are sketchy, and the parameters are broad, but based on the average closing prices of Vanke H-shares, this would mean an increase of 19% to 27% in shares outstanding dependent on whether they raise 40 or 60 million rmb ($6.1 to $9.1 $US Billion).  Below is the possible scenario and its resultant share increase and ownership changes based on the amount to be raised at a 5 day or 20 day average closing price for China Vanke H shares. (This is based on the pre and post ownership – see below.)

 

Vanke Share Issue 1.PNG

As stated above, there are currently few details on the swap.  Based on the scenarios I’ve shown, which are reasonable based on other transactions in the Chinese market for private share issuance, China Vanke shareholders will face a significant stock dilution to fight off the Baoneng bid.  It’s much too early to see if the swap for property related to metro stations will be worth it.  Additionally, Shenzhen Metro will have a large, controlling interest in Vanke which will give it leverage over decisions.  State ownership, including China Resources, will be from 32% to 38% and could lead to less control over projects than Wang Shi had bargained for.

Original Ownership: Pre- and Post Issue based on 20 day avg. stock priceVanke 20 dayOriginal Ownership – Pre- and Post Issue based on 5 day avg. stock priceVanke 5 day

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