Real Estate

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

The convoluted battle for control of China's biggest property developer just got even more tangled. China Evergrande Group has bought a 4.7 percent stake in China Vanke, which has been fighting off an approach from little-known conglomerate Baoneng since late last year. Whether Evergrande is playing the role of a white knight or another predator, its arrival hardly bodes well for Vanke.

The latest player joins an ownership tussle that already counts Baoneng, China Resources, Shenzhen Metro, China's securities regulator and Vanke management among its crowded cast. Unlike Baoneng, Evergrande has a public profile and a market value of more than $9 billion through its listing in Hong Kong. Unfortunately for Vanke shareholders, Evergrande's entry associates one of China's most conservative developers with arguably the most profligate.

There can be few examples of two companies that, while competing directly in the same industry, are so different. Their credit scores perhaps offer the best summary. S&P Global Ratings has Evergrande at B- with a negative outlook, or on the verge of the C category, which signals distress. Meanwhile, Vanke is rated at BBB+, two levels above S&P's lowest investment grade.

There's a reason for the divergence. Look at the leverage trajectory of both companies:

Different Gearing
Evergrande owed 39 cents for every dollar of assets at the end of 2015 while Vanke owed 16 and dropping
Source: Bloomberg

Evergrande has almost $6 in debt for every $1 of shareholder equity still left on the balance sheet, while Vanke has only 79 cents.

Double Mortgage
Vanke has been reducing its debt in relation to common equity, whereas Evergrande has been leveraging up further
Source: Bloomberg

That situation will probably worsen now that Guangzhou-based Evergrande has spent 9.1 billion yuan ($1.4 billion) buying Vanke shares.

While Vanke's Shenzhen-traded stock has bounced in the past two days on the Evergrande investment, the latter's free-spending approach is anathema to the target company, which values conservative financial management.

The last thing Vanke investors should want is a potential Evergrande-nominated board member pushing the company to fuel its growth with more debt. Evergrande shares have also popped in Hong Kong, though shareholders may question whether this was the best use of cash that could have been used to reduce gearing.

Whether Evergrande is coming in to help fend off Baoneng's hostile takeover or to add pressure for it to happen, Vanke should be wary.

Evergrande is hoping to have influence in the Shenzhen-based developer, according to JPMorgan analysts led by Ryan Li, Bloomberg reported Friday. Vanke shareholders will have to hope that isn't the case.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(An earlier version of this column corrected the third paragraph to show that BBB+ is two levels above S&P's lowest investment grade, and the key of the first chart to show that measure is total debt to assets.)

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net