Category Archives: China Construction

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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China Vanke Reveals Evergrande Investment Details

Vanke Ever Stock

China Vanke,  2202 HK, admitted that fellow developer China Evergrande Group, 3333 HK,    bought a large number of  A shares, vaulting it ahead of the last count of Anbang Insurance shares.  The ownership is complicated, with Vanke providing ownership  details today.

Vanke Evergrande

This adds some interest to the takeover battle with Baoneng, currently with a majority interest in China Vanke.   Baoneng surpassed China Resources’ ownership via multiple additions in 2016.  Investment vehicles included asset management plans which have been targeted by Vanke Chairman Wang Shi, 65, as having an unhealthy impact on the Chinese economy.  Once again, the investment vehicles in A shares are complicated.

Vanke Baoneng

Source: Annual Report

The other significant owners are China Resources,  Anbang Insurance and Guosen Securities through an investment linked to an asset management plan linked to Industrial and Commercial Bank of China – per the last annual report of China Vanke.

Vanke China Re

The only shareholder with Board seats in this group is China Resources, with 3 votes out of the 11 total.  The other shares are owned by the directors and one by a  Blackstone affiliate which has an independent director on the Board.  Baoneng has attempted to get seats through a board coup but has so far been defeated.

Evergrande has stated the buy was purely an investment in one of the largest developers in China with strong results.  Evergrande has been criticized by Moody’s for this and other investments due to its high leverage.  The battle shall continue between Vanke’s Wang Shi, 65, with only a .069% interest in the company he founded and 46 year old Baoneng founder Yao Zhenhua and now 56 year old Hui Ka-yan, who owns over 73% of Evergrande.  As a major competitor of China Vanke, it’s doubtful that Evergrande will support the embattled Vanke chairman. Evergrande’s multiple, influential bankers will be watching.

Evergrande Bankers

For earlier reports on this conflict, read here.

Source, Annual Report

China Vanke Points the Finger at High Risk Baoneng Ventures While Anbang Investor Embraces Risk

Vanke FingersAs China Vanke, 2201 HK, 000002 SH, continues to fight corporate raider Baoneng, it’s latest charge is that Baoneng has raised the money to increase its stake to 25% was done with dangerous disregard to risk.  Ironically, Anbang, a 4.6% owner in China Vanke,  has recently shown the same criminal disregard to risk, as its premiums sold increased by almost 5 x in June from the prior year.  Anbang is the mysterious, multi-billion dollar company that tried to buy Starwood, HOT, for $14 billion. It was able to increase those premiums in June by increasing sales of high-yield hybrid policies increasing by 16x.  If the reported guaranteed rate of 4.5% is correct, risk is blatant when the official deposit rate maximum in China is just 1.5% and the local stock market returns have been paltry, if any, with the Hang Seng up only .36% year to date and the Shanghai Comp down 14.76%.

Vanke is obviously more concerned with Baoneng’s holdings, reported at 25% on July 6, 2016 after A shares resumed trading on July 4, 2016 and Baoneng added 78.4 million shares.

This saga is far from over as the Chairman of one of the largest developer’s in the world, Wang Shi, continues to fight to maintain control of the China Vanke he founded in the 1990s.

In case you missed it, as Baoneng, upped its ownership in Vanke, Vanke first suspended its A shares to “consider a restructure”, and then tried to sneak through a private share issue to the SOE Shenzhen Metro.  The grounds for the potentially massive share issue to raise between 40 and 60 million yuan, was that Vanke desperately needed the land Shenzhen Metro was sitting on, mainly close to or connected with its metro system.  Once this issuance went through, Baoneng would lose its prominence as a majority shareholder and be replaced by Shenzhen Metro as the largest shareholder.  Vanke may have succeeded since Baoneng had no Board presence but was thwarted when China Re, which had 3 votes, balked at losing its percentage interest.  On top of that, when Vanke caved and asked for a vote, one member abstained, a Blackstone member, claiming he had an interest in the outcome since Vanke was negotiating a purchase from Blackstone.  Without that vote, the approval of the majority vote was protested by China Re, claiming that the abstention meant there was less than the required 2/3 majority.

Thankfully, the public isn’t too affected since Vanke managed to get a waiver on the 25% rule to 10%, (rules are meant to be broken), but admits that the new proposal could drop the float to below that.  Based on the proposal and the last reported share holdings, it definitely will drop it.

Vanke Proposal

Meanwhile, despite the fact that Vanke is one of China’s largest developers, with projects dominating the 1st and 2nd tier cities, its stock has suffered more than the indexes for both the Hong Kong and Shenzhen Exchanges.  (12/18/15 was the date at which the A-shares were halted.  They resumed trading on July 6, 2016, despite the fact that the restructure still wasn’t concluded.)

Vanke stock.PNG

Even the Shenzhen exchange wasn’t happy with the deal and wrote Vanke a letter with 7 problems.  Vanke wrote back with the synopsis as follows: 7/4/2016

1) Re: question on the reasoning for abstention – Vanke stated that conflict of interest which is based on the fact that deal Blackstone is working on would be affected by outcome of vote.

2) Re: question of Independent Director’s Independence: Rebuts that the Indep Director is independent, Vanke states that he is independent per the rules of the Shenzhen stock exchange.

Although Blackstone shares some interests with Vanke, states that these interests are below the threshold & therefore enable the director to be classified as independent.

3) Rebuts question on lack of 2/3 majority required with the abstention. Claims that they had enough members voting without the abstaining member.Claims they needed only 50% to attend, then 2/3 of those attending to pass. 10 out of 11 voted, with 7 voting yes.

Free float under Approved Minimum & Remedy

2) Admits the free float will most likely be below the 10% (standard was 25% but they got a waiver for 10%). Based on pre-existing ownership, free-float will definitely drop below – from 11.91% to 9.45%.  Company considers the .55% deficiency to be immaterial. Company has made no plans to rectify, will act once it happens – could issue more H shares.

Huge Difference between original Capital Contribution of Assets being Bought and appraised value.

3) Deal Value – Claims that value is reasonable due to sign. Land price appreciation since 2012. Since 2012, Shenzhen land price per GFA have increased by 354% while Nanshan prices have increased by 284%. In contrast, the value of Qianhai hub increased by 123% while Antuoshan increased by 44.7%

State of Development of Parcels

4) Explain where the development process, approvals obtained, is on the assets. Early progress, no construction to date, need environmental impact, etc.

Profitability

5) Notes that there has been negative to minimal profits for assets acquired The land injection was made in 2016 – development will eventually make it profitable.

Avg. Trading Price Justification

6)Rule 45 – price can’t be less than 90% of market reference price. Market reference price based on average trading of 20 days, 60 days or 120 days prior to announcement of resolutions of acquisitions. The company justified the price of 15.88 rmb/share stating that it was more than 90% of the 60 day average – prior to the suspension. This price was also supported by historical p/e, & price to net asset value. Based on history – states that the projected price is about 93% of avg.

Dilution of EPS

7) Admits that it will take time for assets to be profitable so there will most likely be a dilution of eps in the “short term”.  Both are in early stages, minimum approvals to date & no construction started.

Where are they now?  The latest filing, 7/21/2016, states that the Blacktone deal did go through, with China Vanke setting up a JV which would own 96% of the properties, at a cost to Vanke of RMB 3,889 million, about $582 million US. Otherwise, the last filing on July 18, 2016 regarding the restructure noted there was nothing new to report, with no approval yet from the State owned assets and Supervisory Boards, the Vanke Board and the CSRC.

In case you were wondering: What are the Baoneng Entities?

Although Baoneng has increased its ownership since the annual report, at the annual, the following entities were listed with their shares, all related to Baoneng:

Baoneng Related

 

 

 

 

 

 

Hong Kong Cement Companies: Rally or Dead Cat Bounce?

CEMENT RALLY

Hong Kong Cement companies rose across the board after BBMG, 2009 HK  announced an increase in net profits for the 1st half of 60% to 80%.  The increase was attributed to an increase in its property sales segment, with net profit of 1,047,743,400 and eps of .22 for the first half.  This is the only indication of the source of the profit increase.  The property development segment had an increase in booked gross floor area of 82% from 398 square meters to 727 from prior year period.

The company stated that sales of cement and clinker product increased by 20.5% year on year, at 17.09 million tons.  No mention of profits in this segment were made.  For the year ending 2015, cement sales were 26.8% of revenue with property development at 41.9%.  Gross profits were just 3.6% of revenues for cement; 15.4% for property development.  For the first quarter of 2016, gross revenue was down 4.25% and gross profits were down 10.4% making the 6 month projection a surprise and dependent upon unpredictable property sales versus higher cement prices and revenue.

In contrast, major operator Anhui Conch, 914 HK,  with a massive market cap of 99 Billion HK (12.8b US) – no 2nd quarter or first half reports yet but 1st quarter showed a sales revenue decline of 5.5%, a gross margin decline of 34.5% and a net profit decline of 31.7% despite government subsidies.  This pure play cement company blamed the declines not on volume declines but on price declines.  It is doubtful that the first half will show a major change in cement prices, while prices remain under pressure and the much promised capacity declines remain a myth.

China to Spend 11.9B on Aviation Infrastructure

China is preparing to spend 77 Billion yuan, (US Eq. $11.9B),on aviation infrastructure this year.  This should be good news for infrastructure engineering giant, China Communications Construction Company, HK 1800, down 3.08% vs. Hang Seng .37% drop. (It’s Shanghai listing, SH 601800, declined .09% vs. the  CSI 300′s .14% rise.)  As mentioned in a previous post, this mammoth SOE disappointed in its first quarter contracts.

China’s Largest Construction Firm Defies Rebound

China Construction Communications Co., CCCC, 1800 hk, 601800, dropped another 5% + in Hong Kong.  It has now dropped over 10% in Hong Kong since 4/21/16 on disappointing 1st quarter new contracts. The latest drop has been less severe in Shanghai, but has shown a greater year to date drop of 13.7%.

CCCC stock

Source: Bloomberg

While much has been made recently over a China rebound, thanks to construction activities and commodities related to a housing price resurgence, (primarily in tier 1 cities), market optimism has not spread to this mainly infrastructure construction company.  (Infrastructure revenues = 86% of 2015 annual revenues).

The latest price drop has been blamed on q1’s new contracts, which showed only a 2% increase from the prior year.  This drop brought a downside risk prediction from Nomura,  which projected a target price of 10.06 at buy.  Despite the lower year on year increase, CCCC reportedly held onto its guidance which was a 9.6%% increase in new projects and a 6.0% increase in revenue, stating that the start of the year was not reflective of the full year.

In fairness, historical quarterly earnings have fluctuated based on the quarter, with the final quarter at the highest.

CCCC quartely

Historical Data based on hkex filings; 1Q 2016 from press report.

While the company may state that the first quarter is its slowest, as is born out in historical comparisons, the decline of 2014 and minimal growth from 1q, 2014 indicates good reason for skepticism.

Full quarterly results have yet been released for 2016 on the Hong Kong Exchange. However, its last annual release showed a continuting downward trend in ROE.

CCCC roe

Source: Morningstar

A summary of the annual report of this 112,000 employee firm follows:

cccc annual

*Helped by effect Tx rate drop – from 21.1% to 19.1% due to “high-tech” enterprise qualification
**Mid term Note, MTN – ISSUED 12/14; INTEREST GENERATED BUT NOT DECLARED; COUNTED AS EQUITY

Source: HK Filings

The company has limited means to match its 2015 performance growth or its projected goals. While it has been pushing to add international exposure, revenue outside of China represented only 19% of the total for 2015.  The company has primarily been investing outside of China in Hong Kong, Macao and Africa but has been prohibited from working on any road projects funded by the World Bank until 2017, due to fraudulent practices found on a road project in the Phillipines in 2009. The company is therefore primarily dependent upon infrastructure projects in China, which have approached saturation, are heavily indebted and have questionable ability to repay debt let alone turn a profit.

Conclusion – CCCC, the dominant China infrastructure SOE company has dropped significantly over the last 12 months but uncertainty in future earnings adds extreme risk to its valuation.  Comparing Financial Times projections to Company projections, shows the Hong Kong listing price to have room to fall, particularly since the company itself projects only 6% annual revenue growth and with 2% year on year for the first quarter.

CCCC PROJ

 

Shanghai Comp Hang Seng Diverge

sh hk upd

The Shanghai Composite, down over 3.86% for the week, managed an anemic rise today while the Hang Seng fell but was slightly positive for the week.  In Hong Kong, the malaise was widespread with 90% of its constituents down.

For the HSCEI, down 1.38%, resource stocks including Anhui Conch, 914 hk,   CNBM, 3323 hk  , China Shenhua, 1088 hk,  were particularly hard hit possibly on the news that infrastructure construction giant, China Communications Construction Company, 1800 hk, down 5.04%, first quarter contracts indicated a much weaker 2016 than projected. First quarter contracts were reported at: RMB107.884 billion, an annual increase of 2.2%. On an annualized basis this would mean it would fall short of its annual full-year new contract target amount (RMB650-700 billion), by about 218 to 268 billion rmb.  Putting this company into perspective, it’s market cap converted to dollars is about 26.4 billion vs. New York Stock Exchange listed Fluor, FLR at 7.57 billion.  It is an SOE which also employs about 110,000 people vs. Fluor’s 38,000. (As an aside, check out an amazing company video.)  Oddly enough, China Communications Construction, 601800 SH,  fell only .172% in Shanghai.

Autos:

As mentioned yesterday, BAIC, 1958 hk, down 6.27%, disappointed with declining net profits. Credit Suisse took down the price target from 5.3 to 5.1, keeping it at underperform as the Hyundai JV profit contribution was weaker than expected.  It also noted that
BAIC changed the accounting treatment on new energy vehicle’s (NEV) government subsidy in 1Q16, shifting from “Other income” to “Revenue”. As a result, the company’s gross margin rose to 5% in 1Q16.

As shown in earlier filings, for the first quarter total volume sold was down by 4.3% with the largest decline and segment, the JV Beijing Hyundai, dropping the most.  This is despite the fact that the company was projecting better performance here thanks to the PRC passing a 50% consumption tax decline for vehicles with a displacement of 1.6L or below from October 2015 through December of 2016.  With auto sales highly variable by month, March alone showed some improvement.

baic sales

Cement Capacity Continues to Defy Government

Following in the footsteps of smaller Asia Resources, 743 HK, China Resources, 1313 HK, reported a stunning first quarter loss 17.3 million rmb from a profit of 632 million rmb the prior year.  This was despite an increase in product sold which was unable to offset the decline in material prices of 26% (Asia Resources reported a decline in price per ton of 22%).

cement 1q charts

While both companies are small compared to Anhui Conch, 914 hk, or CNBM, 3323 hk, they show a disturbing trend of increasing production and sales despite obviously lower demand, in conflict with the constant assurances of the PRC to tackle the overcapacity problem of which cement is a major component.

cement capacity

Source: HK Filings. Asia Cement materials reported as: Cement, Clinker and Slag.  China Resources material reported as Cement, Clinker and Concrete.

Other News:

The PBOC, CSRC, CBRC and CIRC jointly announced that they support iron and coal enterprises to expand exports of iron and coal and to issue corporate bonds for debt restructuring.