Tag Archives: Hang seng

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 July Auto Sales Up, BAIC Skids Downhill From June to July

July Car 1

The China Passenger Car Association reported that July year on year sales increased by 23%. Ytd increases were 11% over 2015. Three Hong Kong car stocks with a combined market cap of 205 Billion hkd, (23 Billion usd equivalent), beat that rise. Geely 175 hk, Great Wall 2333 hk, and BAIC  1958 hk, all reported year on year monthly and year to date sales increases. Geely and Great Wall managed to drive up over 4% from June, but BAIC dove 27%.

3 car stock july changes

BAIC sells its own brand, Beijing Benz, but relies on Hyundai and Mercedes Benz for the bulk of its sales and profits.

BAIC July Sales Type

The drop was striking and defied continued increases by home-grown competitors Geely and Great Wall.

great wall july monthly

geely july monthly

baic july monthly %

Much has been made over the Chinese voracious appetite for SUV’S.  Geely and Great Wall are polar opposites in their reliance on SUV’S, with Great Wall relying heavily on SUV’S, particularly its Haval H6, which is considered a close clone of the 4th generation Honda CRV.  Other types have had little growth, including  the Wingle pickup, with pickups banned  in major cities although some restrictions are easing along with a hope for more acceptance. BAIC only breaks down the sales by type for its own brand, with SUV’s ramping up to 50% of 2016 unit sales from only 7% in 2015.

Geely Monthly Type

great wall july types 2

Based on 2015 unit sales for Geely and Great Wall, there do appear to be seasonal sales variances with the highest sales occurring in the last quarter.  (BAIC was excluded since it didn’t provide monthly sales data for the full year of 2015).

great wall geely seasonal

China sales growth is critical for these companies, with Geely and Great Wall exports shriveling, (BAIC doesn’t report any exports).

Geely Greatwall Exports

Note: All charts and data were prepared from HK Filings with the exception of the stock data, which was from Bloomberg.  March was primarily used as the starting point since January and February are extremely variable due to Chinese New Year.

Despite the year on year overall increases, the stocks in Hong Kong are showing  a moderate trailing p/e ratio; with Geely outperforming the Hang Seng on a year to date and 12 month return basis.  Geely has recently completed the acquisition of two subsidiaries, Shanxi & Baoji, with combined capacity of 300,000 vehicles, construction completion expected in 3Q 2016.

3 car stocks

None of these companies provide sales dollars in their monthly updates.  Interim results have not yet been presented.  BAIC’s Q1 showed an increase in revenue of 30% but a drop in net profit of 25% due to lower JV numbers with Hyundai and increasing operating losses for its own brand.  The increase in profit was mainly due to Beijing Benz, which is owned 49% by Daimler.  Greatwall’s Q1 showed an 8% increase in revenues but a 4.5% decrease in profit, thanks to a lower gm and operating margin. Geely doesn’t provide quarterly statements.

Great Wall Q1

BAIC Q1

 

 

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

Correction: Geely July Sales up 60% over 2015, Maybe

Eraser

Geely Auto, 175 HK, fixed a typo today – stating that the sales of its King Kong sedan were 2,258 for July, not 3,757 as earlier reported.  The 3,757 just happened to be exactly the number they reported for June.  While it’s a small amount, it still would impact the monthly sales change – previously shown at 64% based on July 2015, and 16.3% year to date versus earlier calculated 16.75% and a sequential change of 1.6% vs. previously calculated 4.18%. (I’m assuming the change to the total, the correction didn’t).

Geely ytd and seq corr

Based on data from HK filings

While it’s admittedly a small change, it does make you wonder whether the other numbers are correct.  Truthfully, Geely could do with a spreadsheet presentation rather than the primitive basis they currently use. Of course if they did, it would be easier to see the steady decline in all sedans, including the King Kong.

Geely Sedans

Source: HK filings – started at March since Jan and Feb were combined.

While they made up the decline with the better sales of SUV’S and the new crossover, sedans were still 64% of their units sold in July.  As shown above, every category of sedan is declining, even the relatively successful Emgrand. A new release of the Emgrand, the Emgrand GL, is scheduled for a September release, which may help reverse the slide. It reportedly will come with a 1.3 turbo and a 1.8.  The 1.3 would be eligible for the  50% tax cut good through December while the 1.8 would exceed the maximum 1.6 level for the cut.

Geely Monthly Type

Source: HK filings 

The correction hasn’t hurt the stock.

Geely Stock up

 

Geely July Sales up 64% over 2015

geely cars

Geely Auto, 175 HK, maintained its momentum in July thanks partly to the acceptance of its new Emgrand GS crossover SUV and the recently introduced Boyue SUV.

GEELY MONTHLY JULY.PNG

 

*HK filings – January and February based on an average for both months since company presented combined sales, due to the skewed impact of the Chinese New Year.

Although monthly increases have been gradual, the year on year changes: 16.75%  year to date and 64.05% monthly year on year, show just how bad 2015 was.

GEELY YTD AND SEQ

Geely even managed to turn around dismal export numbers, at least compared to June.

Geely Exports July

Geely’s stock more than reflects this increase, with a 12 month return of 73%, far outpacing the Hang Seng.

GEELY STOCK

Whether the first half earnings will show a major increase in profit, however, remains to be seen with stiff competition and big players like Ford, which sold 577,097 autos in China in the first half compared to Geely’s 280,337, representing an increase of 6%, projecting negative pricing for the full year 2016 for itself and the industry in China to be 6%.  (Ford, F, sells in the Chinese market mainly through Changan-Ford and Jiangling Ford). Based on history, Geely should report around August 19, 2016.  Tighten your seat belts.

ICBC of China Issues 117 Million Credit Cards in 1st Half, Why It Matters

icbc stock

As a tantalizing pre-cursor to 1st half earnings, ICBC HK 1398, stated that it issued over 117 million credit cards with 1st half consumption of 1.4 trillion yuan, ($211.25 Billion). However you look at it, that’s a lot of plastic.  However, in relative terms, it’s not quite as stunning.  Particularly for consumption dollars, the increase is substantial, compared to the 1st half 2015 filing:

ICBC credit cards

Why it matters. In terms of market cap, ICBC is the second largest bank in the world after Wells Fargo Bank.  In China, it’s the largest.  Its credit card issuance and consumption therefore give a view of credit card growth in China, which has historically had a higher dependence on debit cards. It’s also a window to consumer credit use in China and the growth of an important revenue source for ICBC.

For ICBC, and the majority of banks in China, debit card issuance has far exceeded credit card issuance.  Based on the last 2 annual reports, ICBC’s credit cards as a % of total cards has inched up , although growing more than debit card issuance.

icbc cards up

Based on the annual report, confirmed by the 1st half 2016 results, Chinese consumers who do have credit cards are getting more comfortable buying on credit.  This should be good news for Chinese banks, since they’ve been squeezed by lower net interest income after multiple interest reductions by the Central bank.

interest rate changes

Source: Reuters

Add to that a market slowdown and increasing, NPL’S, and banks are grasping for sources of income other than net interest.  ICBC , despite its size and  international holdings, needs that extra income.  The last quarter showed minimal growth in net profit, with commission and fee income representing a consecutively larger part of revenue.

icbc q1 2016

Source: HK filing

While quarterly filings don’t break out bank charges, the last annual showed them to be about 5.6% of gross revenue.

icbc annual other income

Comparing this to the increase in annual card issuance, the 12.5% increase in annual bank cards issued brought about a 7.3% increase in total revenue.  While the latest statement mentioned only credit cards, the increase bodes well for an increase in a significant portion of income.  With a trailing p/e of 5 and below, it needs all the help it can get.  Judging by historical filing, we should see if this assumption holds around 8/27 of this month.

 

 

 

 

 

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