China Vanke's plan to buy assets from Shenzhen's urban rail operator is a shrewd maneuver that would accomplish two objectives in one go: increase exposure to China's hottest property market and fend off an unwelcome suitor.
The country's biggest real estate company will pay as much as 60 billion yuan ($9.2 billion) to acquire property projects above subway stations from Shenzhen Metro Group, mainly through the issue of new shares, under a memorandum of understanding signed at the weekend.
The deal, if consummated, has plenty of strategic logic for Vanke. Shenzhen property prices jumped 52 percent in the past year, with the southern Chinese city becoming one of the biggest beneficiaries of the nation's six interest-rate cuts since November 2014.
Shenzhen Metro has plenty of prime sites to offer. Like the MTR across the border in Hong Kong, along with many other rail operators throughout the world, the company makes money both from ticket sales and selling homes on top of the stations it develops. Such locations are prized for their convenience and typically sell at a premium.
The company, which had 131 metro stations at the end of last year, has been slower to develop real estate projects than global peers, according to Bloomberg Intelligence analyst Patrick Wong. That makes Vanke, with 179 billion yuan of revenue from property sales last year, an attractive partner.
Vanke's chairman and founder, Wang Shi, in comments published on the company's WeChat account, said the two could work on ``railway plus property" projects not just in Shenzhen, but throughout the Pearl River Delta, the manufacturing hub the World Bank has called the world's largest urban area. Shenzhen Metro plans to develop about 371 more stations by 2030, according to Credit Suisse.
Perhaps more importantly, for Vanke management, the deal would result in significant dilution for Baoneng Group, a hitherto obscure company that emerged as the Shenzhen-based developer's largest shareholder in December. A tussle for control has ensued. Wang has questioned the credibility of Baoneng and Vanke said in December that it planned a share sale, clearly aimed at resisting what management has termed a hostile takeover.
Baoneng, through affiliates Shenzhen Jushenghua and Foresea Life Insurance, currently has about 24 percent of the company, according to data compiled by Bloomberg, up from less than 5 percent in July. State-owned former controlling shareholder China Resources has 15 percent, while Anbang Insurance built up a 6 percent stake that's been welcomed by Vanke.
If a deal is valued at 40 billion yuan (the lower end of Vanke's estimate), an issue price of below 14.92 yuan would be sufficient to displace Baoneng as the largest shareholder, Citigroup estimates. For a deal value of 60 billion yuan, a price of 22.38 yuan would be sufficient to make Shenzhen Metro the largest shareholder.
With Vanke shares closing at the equivalent of 15.3 yuan in Hong Kong on Friday, that's not much of a discount, if any, for a pipeline of premium real estate and the prospect of repelling an unknown and untested interloper. (The Shenzhen-traded shares have been suspended since December.) Shareholders clearly like the deal. The Hong Kong-listed shares jumped as much as 14 percent to HK$20.95 on Monday before settling back to trade at HK$20.15, 10 percent higher.
No matter that Vanke is seeking to double down on a property market that may be in the middle of an unsustainable bubble. So far, investors see more positives than risks in the prospect of Wang cementing control of the company, aided by friendly state-backed shareholders. They may be right.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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