Tag Archives: China Vanke

With Fed Rate Rise, Will Hong Kong’s Red Hot Real Estate Finally Cool?

The impact of the Federal Reserve’s rate rise will be far reaching.  With the Hong Kong dollar pegged to the greenback, the HIBOR base rate continues to rise.


Although not in strict tandem, short term rates have finally begun to rise.


Despite the inexorable rise in short-term rates, Hong Kong lenders held steadfast until August 8, when HSBC, Hang Seng Bank, Standard Charter and Citibank adjusted their prime rate to an effective rate of 2.25%.  This was the first change since 2008.  Typically, Hibor linked mortgages revert to prime when a rise in Hibor makes prime-linked mortgages cheaper.

The pain will shortly be felt, as new borrowers have been forced into variable-rate mortgages as banks prepared for the rise.

Hong Kong New Mortgages

While Hong Kong banks may adjust to the risk with variable rate loans, developers have less room to avoid the pain.  Thanks to the rise in Hong Kong property prices, along with the weaker yuan, and restrictions on mainland development in tier one cities, mainland developers have joined the feast in Hong Kong, but may have come to the table late and without a full menu.  Prices and volume appear to have peaked.

Hong Kong Property Prices Chart

Source: Midland Realty

Two of the largest mainland developers, Country Garden, HK 2007 and China Evergrande, HK 3333  bought land at the peak and are therefore vulnerable to a fall.

Mainland developers [are] in a more vulnerable position to any price corrections in the Hong Kong residential market. Their projects in Hong Kong may struggle to break even, or potentially run into losses, if prices decline by more than 15 per cent or 20 per cent,” said Cindy Huang, an analyst at S&P Global Ratings.

UBS has predicted Hong Kong home prices will tumble as much as 10 per cent from this month to the end of 2019, while Citibank forecast a 7 per cent fall in the second half this year.

That is roughly when Evergrande and Country Garden plan to start selling thousands of units now under construction in Tuen Mun and Ma On Shan.

In January, Evergrande Group paid the highest amount per square foot – about HK$8,300 – ever recorded in Tuen Mun, when it bought a site that is expected to be developed into a 1,982-unit project on 8 Kwun Chui Road from Henderson Land Development for about HK$6.5 billion (US$830 million). Henderson reaped an 80 per cent profit on the deal for the land that it bought in June 2015.

Adding in construction costs and interest expenses, the total investment cost for Evergrande’s Tuen Mun project will be about HK$14,410 per square foot.

That means Evergrande will need to sell flats in the development at about HK$16,600 per square foot to generate a reasonable profit of about 15 per cent. However, used homes at a nearby development, Wheelock Properties’ Napa, have been selling for about HK$14,200 per square, which means Evergrande is vulnerable unless home prices continue to climb.

Wheelock Properties, a Hong Kong developer, benefited from buying land early. In 2013, it paid HK$1.39 billion – or just HK$3,683 per square foot – for the Napa site. In 2017, its average flat sold for HK$11,500 per square foot, giving Wheelock a 67 per cent profit, after adding in construction and other costs.

One mainland developer may escape the “late penalty”. Vanke Property (Hong Kong) bought a parcel for HK$3.8 billion in 2015, or HK$4,541 per square foot. That gives it more room to still make a profit if profits begin sliding. To achieve a 15 per cent profit margin, Vanke would only need to price its Le Pont flats at about HK$11,790 per square foot.

“[Vanke Property (Hong Kong)] bought the land relatively early when land in the area was sold at around HK$4,000 per square foot,” said Alvin Lam, director at Midland Surveyors, who added the developer may escape from any possible market downturn as its land price is relatively low.

Like Evergrande, Country Garden also got in late.

Last September, Country Garden paid about HK$2.44 billion, or HK$10,498 per square foot, for a 60 per cent stake in a plot in Ma On Shan owned by Wang On Group.

For Country Garden to net a 15 per cent profit, the 547-unit project would need to sell its flats at about HK$18,219 per square foot.

In contrast, Henderson Land achieved a profit margin of 68 per cent at its nearby Double Cove project by just selling its flats at about HK$15,000 per square foot. It had bought the land there in 2009 for HK$3,253 per square foot.

“These mainland developers have responded to this challenge by slowing down their land purchases in Hong Kong this year, due to expectations of thin margins and tightened financing conditions,” said Huang of S&P Global ratings. “Refinancing pressures continue to hamper mainland developers [however]. This lower rate of land acquisition in Hong Kong is likely to continue.”

Quote Source: South China Morning Post

With the rising prices, Hong Kong has grown to be among the least affordable markets in the world.

Housing Affordability Hong Kong

Developer stocks, which have seen explosive growth on both the Mainland and Hong Kong have finally been declining, along with the indexes thanks to both the creeping interest rates and the US China trade war.  The majority have fallen close to 20% from their peak. There is most likely more pain to come.

Property Developers Hong Kong Mainland






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.


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







China Indexes Go Red

China Indexes slipped after yesterday’s exuberant rise. The drop left traders scratching their heads.


Given that the indexes are still above the start of the last 30 days, it could be a short-term correction.

Sh HK 1 mo Chart

(1 month – Shanghai Comp Orange; Hang Seng Index Blue)

The decline was felt pretty much across the board.  For the Hang Seng, 76% of its members dropped.  The small positive group of 18% consisted  mainly of property related companies. The HSCEI, which declined 1.19% also had negative members dominate at 88%. The four positive movers were: Wanda Commercial, hk 3699, China Vanke, hk 2202, PICC 2328 and Air China, HK 753. The only one of these linked to news was PICC, with UBS expecting a positive improvement in the Property and Casualty Financial Service Industry  in China, lifting its target price of PICC to 17.2 and rating it a buy.

Telecoms – Telecoms continued yesterday’s slide despite the biggest, China Mobile, announcing that its 1st quarter saw a net addition of 7.61 million mobile customers. Net profit was up only .5% and the company noted the growth rate for the whole year would be challenged, ” in the first quarter of 2016, ARPU of mobile customers was RMB57.6 and recorded a slight increase compared to last year. “China Mobile, 941 HK, down .949%; China Unicom,  762 HK, down 2.977% with UBS noting its profits are under a lot of pressure and cooperation with rival China Telecom is minimal. China Telecom, 728 HK, down 3.118.

InsuranceChina Life, 2628 hk, down 1.837%, announced its first quarter profit could decrease by 55% – 65% due to a decline in investment income an a change in accounting methods. China Life has had a dismal run, down 49.6% over the last 12 months and 12.19% year to date.

china life hsi

China Life H2628 HK, Orange; Hang Seng Blue

Overcapacity and Cement

Asia Cement, 743 hk, up 2.9%, one of the smaller players in the cement industry, continues to produce despite negative earnings and government edicts to decrease production in cement nationwide. Today’s filing revealed an 11% decline in revenue, coupled with a drop in gross margin from 16% to 9.9%.  First quarter NOI losses after Taxes were -62.8 million rmb from NOI of 1.4 million rmb the prior year. The company continues to churn out product despite obvious declines in demand, upping sales tonnage by 17% while prices dropped by 24%. The pledged decline in overcapacity industries in China appears to be a myth.

Asia Cement

Ping An, 2318 HK, released its 1st quarter financial statements for its banking subsidiary. At first pass, results are impressive with net interest income, commission and fees all up. As noted in the filing, these increases were due to an emphasis on Mega: “This is to establish a platform for “mega investment banking, mega asset management and mega transaction” supported by the four engines of growth, namely “corporate banking, retail banking, interbank banking and investment banking”.

However, while revenues were up 33% year on year, net income after tax was up only 8.1% thanks mainly to a doubling of asset impairments.

ping an income

Not surprisingly, the NPL ratio and Loan loss provision increased dramatically.

ping an npl.PNG

It’s interesting to note that despite interest rate drops by the Central Bank, Ping An has actually increased its net interest margin, thanks to a slight drop in yield on interest earning assets more than offset by a decline in interest rates on liabilities.

ping an interest income.PNG



Celebrate! Hang Seng China Comp Rise on Positive Export News


Markets in China rose thanks to March exports rising year on year by 11.5%. Whether it’s real or a result of factories re-opening after 2 to 4 week closures and slowdowns due to the February start of the New Year celebrations remains to be seen.

Shanghai Hang Seng Dr

With minimal other Chinese market or economic news, (China gdp due Friday, 4/15), the rise can truthfully be attributed to the export news.

Large-scale developer China Vanke, HK 2202, with A-shares still suspended, announced a new debt issue: 1.375 Bill HK$, 2.5%, due 2019 under the 2 bill hkd medium term note program.  Proceeds for Working capital, investment & other general needs.  Rated Baa2 -Moody’s, BBB-S&P, BBB+ -Fitch.  Issued to Professional investors only in Hong Kong & outside US. Issuer: Bestgain Real Estate Lyra Limited, an indirectly wholly-owned subsidiary of the Company.

While the HSCEI index which Vanke is a constituent rose 3.95%, Vanke saw no change in its stock price.  One of the largest developer in China, Vanke demonstrates its ability to raise debt despite but its continued battle with Baoneng, has done little to raise its stock.vanke vs index

(China Vanke – Orange; HSEIC – Blue)


Shanghai Comp and Hang Seng Up as Market Projects More Stimulus to Follow

shanghai hang seng


Reportedly due to CPI lower than projected, at 2.3% vs. projected 2.4% & below target of 2.5%, giving room for more easing expectations, the Hang Seng & CSI rose. The HSEIC index, up 1.17% saw a rise in 38 of its 40 constituents, with the cement majors CNBM, HK 03323, and Anhui Conch, HK 00914 showing outsize gains of 8.4% an 4.4%, respectively.  Given the horrible operating losses of these two thanks to rampant over- supply of cement and cutthroat competition, it would appear to be a short-lived bounce. Dong Feng, HK 00489, one of the big 3 China autos, also rose 4.6% apparently thanks to stimulus hopes, with no news and car sales in China at a much muted level in 2015 compared to prior years. China Vanke HK 02202 , also on this index, as its A shares continued to be suspended, showed an increase of 4%.  (See my earlier report on ownership battle.)

Latest filings showed Security firms diverging – 1st quarter limited performance reports, compared to 2015, showed Haitong dropping over 34% while Citic Group continued to grow:

Haitong Citic


As is usual with quarterly updates for these companies, no explanations or comparisons were given.

Also in filings – Huishang Bank, HK  03698, extended its proposal to issue new A shares as the original proposal approached expiration. (Orig. May 13, 2015 – shares have since declined from 4.05 hkd to 3.82 hkd.)

Shanghai Fosun Pharma, HK 02196, announced a renewable bond issuance approval to a maximum of 6 Billion rmb primarily for working capital and principal and interest payments.

China Eastern Air, HK 00670, going for yet another round of super-short term notes, 4th tranche 2016, 3 billion rmb, 259 day maturity, 2.5% interest.  Proceeds to refinance existing bank loans. Nothing new on the progress of the  “non-public issuance of A-shares”, approved by CSRC on 1/8/2016. That new share proposal totalled 2.3Billion shares, about a 17% increase in combined A and H shares after including the H shares sale to Delta, NYX DAL.

Troubled developer Kaisa Group, HK 01638, announced a further delay in filing its 2015 annual and semi-annual reports.  The stock has been suspended since March of 2015 & restructuring efforts have been ongoing with no final resolution.

Cement giant CNBM, hk  03323, announced continued interest in tabloid worthy  Shanshui Cement , HK 691,  with suspended H shares since 5/2015, thanks to disputed management hijacking, record stealing, dueling interests, police inquiries and more.

More “non-public issuance of A-Shares”.  China International Marine Containers, CIMC, HK 02039, plans to issue about 386Mill shares to raise maximum of 6B rmb for various projects including financial leasing company and working capital along with property development and investment.  Proposed buyers are the usual unnamed 10 lucky investors with a 12-month lock-up.  Shares would increase by about 13%.



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