Category Archives: Real Estate China

China Vanke Shoots For New Board, No Barbarians Allowed

Embattled China Vanke, hk 2202, has finally set a meeting to vote for a new Board, the current term having expired in March of 2017.Vanke Board

Source: Hk Filings, latest

Out: Wang Shi, Vanke founder, China Re Representatives & Blackstone. In: SZMC with equal representation to Vanke.  The board also appears to have some new diversity with non-related representatives.

What’s Missing: Baoneng, Anbang.

The major reason for the delay in the new vote was to ensure Vanke executives maintain control, or at least split it with an entity of their choosing, despite their minority ownership interests.  They’ve been aided in their quest from outside sources.

  • China Re, which owned 15.3%, agreed to transfer them to Shenzhen Metro, SZMC.
  • China Evergrande, 3333 hk, a competing developer which had been stockpiling shares, volunteered transferring its voting rights to SZMC.
  • Evergrande officially sold the shares, at a loss to its original cost, to SZMC.  (No, Evergrande isn’t a charity – they are pursuing a back-door listing in Shenzhen which will very possibly be aided by this gesture).
  • Other heavy owner & tagged a barbarian, Baoneng, was prohibited from selling certain insurance products and its Chairman was prohibited from insurance for 10 years.
  • Vanke started a lawsuit in February, 2017, to invalidate Baoneng’s shares based on its use of leveraged products to acquire them.

Despite all these visible moves, the fact remains that Baoneng still holds 25.4% of the company’s shares and would be assumed to have a legitimate reason to expect Board representation.  The executives from Vanke’s side own a minor percentage of shares. Another insurance company, Anbang, also owns a significant amount of shares.

Baoneng Owner

Source: HK filings

The June Meeting, Friday the 30th of June, should be an interesting one.  Although the stock has been rising on the news, it’s still too early to know if the proposal will get the 2/3 majority needed.

 

 

 

 

Developer China Evergrande’s Backdoor Listing May Have Hit a Speed Bump

 

China Evergrande Stock

China Evergrande, 3333 hk, may have hit a speed bump on its race to its backdoor listing in Shenzhen.  In a brief, 2 page Hong Kong exchange announcement, Evergrande stated that the original agreement from December, 30, 2016  would be amended to change an intended strategic advisor’s legal entity and amount to be invested.  While on the surface it appears innocuous, the change indicates that since this investor would be raising its investment as part of the 30 Billion rmb capital injection, ($US 4.3 Billion), another investor would be potentially decreasing its investment.

The original agreement with 8 investors included the following:

Evergrandes Capital Raising orig

With the revision, assuming all pre-existing investors maintain the original investment amount, the capital to be raised would be 30.5 Billion rmb.

Evergrande Capital Raising new

China Evergrande has reason to expect this backdoor listing to occur, since on 3/16/17 it transferred its 14.1% voting rights in China Vanke, 2202 hk, to Shenzhen Metro Group, sacrificing its voting rights to augment Shenzhen Metro’s voting rights from 15.3% to 29.3% to surpass barbarian Baoneng’s 25.4% shares. (No mention of money changing hands for the transfer, although Evergrande was able to use the shares as collateral  for financing with Citic Securities).  Shenzhen is both a major entity in the Evergrande capital raise and the China Vanke controlling shareholder changes.

Although China Evergrande appears to have done everything necessary to seal its backdoor listing, this latest change implies it may not go as smoothly as it hoped.

China Evergrande, 3333hk, chart

Evergrande Chart

Chart Source: Bloomberg

Dalian Wanda Names Last Day to Trade

Wanda A Shares

Dalian Wanda,  3699 hk, will stop trading on the Hong Kong Exchange on September 13, 2016.  The stock resumed trading after the de-listing approval, and closed at 52.5 hkd, just .3 below the offer price made by a consortium put together by Wanda.

In the meantime, it’s working on its A share listing, which it promised within 2 years from the Hong Kong de-list, giving the consortium buyers liquidity and itself improved access to capital markets. The original A share listing was submitted in July of 2015, with a 1 year extension approved in August, 2016.  As shown above, this would equate to about 56.16/share hkd vs. the accepted offering price on the H shares of 52.8 hkd.

Originally the total shares proposed were 300,000.  That dropped to 250,000 in August, 2015 while the projected proceeds of 12 Billion rmb remained unchanged.  Additionally, the extension request stated that the listing would be on the Shanghai Exchange while the original offered either the Shanghai or the Shenzhen.

The proceeds were earmarked for the following:

Wanda A share proceeds

The A-share request was submitted to the CSRC in November of 2015 but has yet to be confirmed.

Wanda and its 60 year old Chairman, Wang Jianlin, has a lot riding on the approval besides the needed proceeds.  It has reportedly guaranteed an annualized 12% return to domestic investors and 10% to overseas investors if the listing doesn’t happen by 8/31/2018 via promised buyback.

 

 

Wanda Wins Thanks to No Shows

 

 

Wanda Final Vote

Dalian Wanda,  3699 HK,  won its fight to de-list, thanks to low voter turnout.  Wanda showed that it got more than the 75% votes needed to de-list its H-shares. The against votes were also less than the needed 10% to defeat. However, the “For” votes only represented 58% of the eligible Independent votes, which would have been well below the 75% needed assuming those absent voted either against or abstained.  The missing 217,357,004 of eligible voters represents a whopping 34% of the shares.  Makes you wonder why they didn’t vote.  No mail or internet?  No flights to Beijing? (Also makes me feel a little better about what I wrote here.)

The shares, which closed at 51.2 hkd prior to suspension on 8/16/2016, will resume trading on 8/16/16.  The offer price was 52.8, hkd.  Dalian Wanda will be filing for the listing withdrawal.  The H shares represented just 14.4% of the total shares of the company or about $4.4 Billion US of the $30.8 Billion US market cap based on the offer per share.  Of that $30.8 billion US, about $17 Billion US is currently owned by Jianlin Wang and Wanda directors.

Next Up: the A share listing.  The extension of the A share listing was approved by 99% of the total shares and will be pursued.

Current Ownership

Here are the owners as presented at the date of the meeting.

wanda a and h owners

i Ms. LIN Ning is the spouse of Mr. WANG Jianlin
.ii Mr. DING Benxi, Mr. QI Jie, Mr. ZHANG Lin and Mr. YIN Hai are directors of Dalian Wanda Group.Mr. LIU Zhaohui is a director of the Company and the vice president of Dalian Wanda Group.Mr. QU Dejun is a director of the Company and the president of a wholly-owned subsidiary of Dalian Wanda Group.
iii Dalian Wanda Group is controlled by Mr. WANG Jianlin through Dalian Hexing. which in turn controls approximately 99.76% of the voting rights in Dalian Wanda Group.The remaining 0.24% voting rights in Dalian Wanda Group is controlled by Mr. WANG Jianlin directly.
iv This includes the shareholding of one Director.In respect of the Domestic Shares, Mr. WANG Zhibin, an executive Director, held 1,600,000.Domestic Shares.In respect of the H Shares, Mr. QI Daqing, an independent non-executive Director, held 20,000 H Shares.
v CICC is the financial advisor to the Joint Offerors and relevant members of the CICC group
vi The limited partners of WD Knight VIII are PA Investment Funds SPC II and PA Investment Funds SPC III,and all the management shares.in both companies are owned by Ping An of China Securities (Hong Kong) Company Limited, a subsidiary of Ping An Insurance (Group) Company of China, Ltd.Certain group members of Ping An Insurance (Group) Company of China, Ltd, hold in aggregate 505,561 H Shares.All such H Shares are not proprietary interests of PA Investment Funds SPC II and PA Investment Funds SPC III,
vii One of the limited partners of WD Knight IX is Guotai Junan Finance (Hong Kong) Limited.Guotai Junan Securities (Hong Kong) Limited is a fellow subsidiary of Guotai Junan Finance (Hong Kong) Ltd.
viii All these Domestic Shareholders who hold H Shares have abstained from voting on the resolution in relation to Delisting in the EGM and in the H Share Class Meeting.
ix The percentage numbers of total Shares in issue in the above table add up to only 99.99% due to rounding
x This means H Shares held by the Independent H Shareholders, being H Shareholders other than theOfferers and persons acting in concert with any of them.Such Joint Offerors and persons acting in concert with any of them do not include relevant members of CICC.group, Ping An Insurance (Group) Company of China, Ltd., Guotai Junan Securities (Hong Kong) Limited whichholding of interests. H Shares are non-discretionary and not their proprietary owned.

 

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.

 

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

Shanghai Composite and Hang Seng Falter

SH HK UP

Major Chinese indexes faltered pending 1st quarter earnings reports, Wednesday’s data on March industrial profits and  April consumer sentiment and mixed signals from regulators.

Commodity Bubble:

Commodity trading raised alarm bells with both Deutshe Bank and Morgan Stanley noting the spike in volume.  Per Bloomberg:

The recent spike in speculative trading in commodities in China has stunned global markets, according to Morgan Stanley, which cited a jump in local activity for steel, iron ore and cotton as well as eggs and garlic.

“Now China’s speculators engage commodities,” analysts including Tom Price and Joel Crane said in an e-mailed note on Monday. “China’s latest speculative spike has stunned global markets.”

To put it in perspective, also per Bloomberg:

“The fact that trading volume for steel rebar contracts was at 223 million tons of rebar last Thursday, more than China’s full-year production of steel rebar, raised concerns about the repeat of boom-bust scenario seen last year in China’s equity market,” analysts at Oversea-Chinese Banking Corp. wrote in a note on Monday.”

Finally, a picture courtesy Zerohedge:

Trading Volumes Commodities

Banks and Property Agencies Under Pressure to Slow Shanghai Skyrocketing Prices

Per Bloomberg,

China’s banking regulator in Shanghai is halting business between commercial banks and six real estate agencies for a month, the latest in a string of measures to contain risks in the housing market.

The suspension, which takes effect Monday, covers agencies including the local arms of Beijing Homelink Real Estate Brokerage Co., Pacific Rehouse Co. and Shanghai Hanyu Property Brokerage Co., according to a statement by the China Banking Regulatory Commission’s Shanghai office on the city’s official Weibo microblog account.

In the same account, branches for two of China’s largest lenders, Industrial and Commercial Bank of China,  1398 hk, and Bank of China, 3988  hk, along with HSBC are suspended from issuing mortgages for the next two months.  The reasoning given eerily echoes the subprime meltdown as:

China’s central bank Governor Zhou Xiaochuan last month told banks to better assess customer creditworthiness in mortgage lending to reduce risks, adding that unauthorized loans by real estate agents increased the chances of bad debts.

While the overall management on residential mortgage loans is “relatively prudent,” some real estate agents advanced the transactions by providing down-payment loans and bridge loans, the statement said. Some commercial banks also violated rules with their practices on mortgage loans, according to the statement.

China Eastern Stalls Again

Despite the news that CTRIP, CTRP NYEX, is stepping up to invest about 3Billion rmb’s into China Eastern, 670 hk, the stock swooned ovef 5% today while China Southern, 1055 HK, dropped 1.2%, and Air China, 753, hk  dropped 2.5%.  The air pocket could be due partly to the following:

  • The 3Billion rmb is just a small portion of the 15 Billion China Eastern announced it would raise with a new, private A-share offering.   Approved by the CSRC in January of 2016 with this investment being the first actual investment since then. The bulk of the money is needed to buy 23 new planes.
  • China Eastern faced headwinds when it tried to buyback  3.3 Billion yuan notes due March 2017, 4.8%, guaranteed.  After offering to buy via a dutch Auction with a minimum price under par, the company got no quorum and amended the offer to par + accrued interest and extended the offer to 4/27/2016.  (The bonds were issued in March, 2014, to professional investors).
  • The company has been issuing super-short term notes to finance working capital while it waits for  the proposed shares to be bought to finance its expansion. In April alone it issues 4 separate tranches totalling 12 billion rmb.  Since the beginning of 2016, it has issued 19.5 Billion in super short term notes, generally refinancing existing debt.