For Vanke, Better the Devil You Know

At least Chairman Wang Shi's strategy makes sense.
At Closing, June 18th
33.04 USD

That China Vanke, along with some undisclosed parties, is considering buying a mystery commercial-property asset from Blackstone may seem cause for concern. Here is a real estate company attempting to fend off a hostile takeover with the help of a state-owned subway operator. Free market proponents may argue that shows just how backward, or opaque, the country's corporate governance systems really are.

There may be an element of truth in that, but cut the nation's biggest publicly traded homebuilder some slack.

Baoneng Group, its biggest shareholder, is seeking to shoot down Vanke's poison pill attempt, as well as get rid of its management team. This from a highly leveraged company with a largely unproven track record.

Led by avid hiker and former People's Liberation Army soldier Wang Shi, Vanke has grown via smart acquisitions of property and the lucky coincidence of big exposure in cities such as Shenzhen. Baoneng's plans to dislodge Wang, Vanke's chairman, and his team just as the company is getting started on a new stage of diversification look short-sighted.

Fortunate City

New-home prices have been surging in Shenzhen

Source: Bloomberg Intelligence, China Real Estate Information Corp.

Baoneng opposed the planned $6.9 billion share-for-property swap with Shenzhen Metro last month and in that stance, found support from another large Vanke shareholder, state-owned China Resources. Emboldened, Baoneng pushed to have Wang and other key management removed.

Baoneng continues to acquire stock in Vanke through two units -- Shenzhen Jushenghua and Foresea Life Insurance. The former, according to a June prospectus, is borrowing as much as 15 billion yuan ($2.2 billion) to repay about 8 billion yuan of debt and replenish working capital. Jushenghua's debt-to-asset ratio has more than doubled to 75.5 times as of Dec. 31 from a year earlier, the sale document shows.

Who knows what Baoneng's end game is? At the very least, Wang's mission is clear.

Vanke's attempt to get itself bought by Shenzhen Metro was a clever way to become more than just a housebuilder. 1 That metro-plus-property model would have given it coveted real estate right alongside new train routes. And while things have cooled in Shenzhen in recent times, it's still home to some of the headiest price gains, plus fresh development sites are scare.

Buying commercial property, whatever it may be, from Blackstone gives Vanke much needed diversification, and could become a source of rental income. The company announced plans to expand beyond property development and become an integrated service provider early last year, before Baoneng built its massive stake. It's also important to note that Beijing isn't exactly shy when it comes to imposing sudden cooling measures on home-price gains, and the current uptick in first- and second-tier cities may come to an abrupt halt.

Room for Improvement

China Vanke's net debt-to-equity ratio has had its ups and downs

Source: Bloomberg

Some may argue that under Wang, Vanke has eroded profit margins at the expense of sales. While it's true the developer's volume-driven model of purchasing land has increased its debt, its strategy is for the most part sensible and clear cut. What Baoneng may be planning seems anything but.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Vanke makes about 97 percent of its revenue from property development.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at

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