Dalian Wanda’s Delist: The Odds Could Be Against

 

HKEX X

Press reports and various confidential sources have stated the chances of Dalian Wanda’s, 3699 hk, delist are guaranteed.  Granted, the power and connections of its chairman and founder, Wang Jianlin, make it hard to argue against.   The clock is ticking until the vote count on Monday, August 15, to approve the de-listing.

Background:

On April, 25, 2016, hardly long enough to let the ink dry from the Hong Kong IPO listing in December, 2014, Wanda halted share trading, on an important announcement.  After getting together the money needed, the company announced on 5/30/16 that it had  a consortium ready to buy out the existing H share holders and de-list from the Hong Kong Exchange.  The offer was reportedly due to dis-enchantment with the downward spiral of the H shares – going from the 48 hkd offering to 38.8.   The offer was at 52.8 hkd, a 36% premium to the last close on 3/31/16.  The targeted investors were reportedly offered  a guaranteed return if the company subsequently failed to list the A shares.  The investors included newly formed subsidiaries of Dalian Wanda, under the name of WD Knight I through X, with the CEO of Wanda Investment Company, Mr. Lu Xiaoma, as director of the majority of them.  The interests would then be transferred to various investment entities. The bulk of the financing was provided by China Merchants Bank and CICC Hong Kong Finance.

On the surface, this looked like a great deal.  All cash and a nice premium.  A ticket out of the volatile, frightening China market. The company needed 75% of the independent votes, basically all the H shares, the holders of which were mostly  based in China or Hong Kong with links to Wanda. There was the little matter of the ability to cancel with just 10% disapproval, but that should be easily overcome.

The announcements make the point of the many different premiums of the final offer. Premium over last trade, over average, etc.  The one premium which is harder to accept, is just 13% over the Net Asset Value as of 12/31/2015.  The other less exciting premium is the amount over the original IPO – just 10%, about 7% annualized.  Less than Wanda is reportedly guaranteeing investors if the  A shares don’t list  in 2 years.

Do the current investors actually believe that legendary Wang Jianlin has only managed to eke out a 10% return on investment since the 12/14 IPO?  By his own admission, in a 2015 speech at Harvard, he boasted that, thanks to Wanda’s size and connections: “We thus can take the initiative, and we have the bargaining power,” he told the students at Harvard. That means he acquires land at less than half the cost to his competitors…”  That same article quoted from the IPO prospectus: Even as property prices set records in China, the price that Dalian Wanda paid for access to land fell by more than 40 percent from 2011 to 2014.  Did he lose his magic touch in 2015? Remember, this is the same man who said his wolf-pack could destroy Disney’s tiger.

Since 2015, Wanda has a land reserve of 73.95 gfa million square meters.  This encompasses China as well as overseas. (From its annual report):

wanda gfa regional

While the Hang Seng has only risen 3.8% year to date, real estate prices in tier 1 and 2 cities in  China have made outsized gains.  Per Moody’s,  for the sixth consecutive month, all four first-tier cities posted double-digit year-on-year price growth. Shenzhen continued to register the highest price growth at 47.4% year-on-year in June, followed by Shanghai’s 33.7%. Meanwhile, year-on-year growth was 22.3% in Beijing and 19.4% in Guangzhou in June, and the pace of growth remained on an increasing trend. On average, these four first-tier cities registered year-on-year growth of 30.7% in June compared to 32.1% in May. Average property prices in second-tier cities rose for a seventh consecutive month in June, at a year-on-year growth rate of 7.6%, compared to 6.6% in May. Prices in Xiamen grew the most, at 34% in June year-onyear, followed by Nanjing and Hefei at 31.5% and 29.1%, respectively. Hangzhou, Tianjin, Fuzhou and Wuhan also reported double-digit year-on-year price growth.

Wanda’s detail of land reserves doesn’t specify cities.  However, as stated in the 2015 annual report,

In 2015, the Group took a more prudent approach by selectively investing in first-tier and second-tier cities and certain third-tier cities with good fundamentals, as well as controlling the overall land acquisition cost, to further optimize the land reserve structure of the Company. As at 31 December 2015, the Group had land reserves with an aggregate GFA of approximately 73.95 million sq.m.. We have 52 newly acquired land projects in 2015 (including the land acquired in phases for future development of Wanda Plaza and Wanda City) with an aggregate GFA of approximately 17.73 million sq.m.

In that same report, Wanda breaksdown the land reserves by city tier:Wanda land reserves % tier

Source: 2015 Dalian Wanda Annual Report

The bulk of those properties are in the rich coastal and central areas, as shown by a map from the report.

Granted, Wanda is a mixed-use developer with investments in commercial and residential properties which it both sells and manages.  However, the bulk of its profits and net income in 2015 were made from property sales.

Wanda Income Sources

This gives further strength to the argument that Wanda’s value, based on property values, has most likely increased since December 2015.

While Mr. Wang Jianlin may have been unhappy with the stock performance, the company has benefited from its listing with high quality, low interest debt.  In 2016 alone, it added 37 Billion yuan worth of debt, equivalent to about $5.6 billion, at interest rates from 3.2% to 4%, all maturing in 5 years.  The use of the funds was listed simply as working capital, bank repayments and project investment. This  has also added to the value of Wanda since December of 2015.

The original offering was for 600 million shares.  With additional shares added and the over-allotment, the final shares were 652,547,600.  The cornerstone investors plus the additional shares issued after and the over-allotment, total about 75% of that.  Only two of the cornerstone, China Life and Kuwait Investment Authority, KIA, have committed to the vote, or about 14.85% of the total. Ping An, which has extended loans to Wanda and is involved in one of the buyers, has another 14.85% and could be assumed to vote in favor.  Blackrock has been adding shares and last reported about 6.2%.  Adding that to the 4.95% shares of APG, there is the potential for a 10% dissent. That is all that is needed for the deal to crash.  Monday will tell.

 

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