Vanke’s Wang Questions Biggest Owner’s Intentions, High Leverage

  • Wang Shi says Baoneng’s bid for control hurts small investors
  • Yao Zhenhua says Baoneng’s investment legitimate and safe

China Vanke Co. founder and Chairman Wang Shi said Baoneng Group’s attempts to control the nation’s biggest publicly traded developer after becoming its biggest shareholder are hurting smaller investors, and questioned the closely held company’s intentions.

In an interview with Xinhua News Agency, Wang also said Baoneng’s strategy of using expensive financing and high leverage to invest in shares threatens to have an “unhealthy impact” on the Chinese economy.

Wang is fighting back after Baoneng, a conglomerate thrust into the spotlight after it displaced state-owned China Resources (Holdings) Co. as the biggest Vanke shareholder in December, opposed a restructuring plan and called for the removal of almost all Vanke board members. Vanke’s A shares, which trade on the Shenzhen stock exchange, have declined more than 20 percent this week after trading resumed on Monday following a half-year suspension. Baoneng boosted its stake to 25 percent this week.

“Baoneng has become the biggest shareholder for only a few months and they’re removing the entire board and ousting the entire management. Do they really have the ability to manage this company well?” Wang said in the Xinhua story, published on Friday. Baoneng obviously is seeking to control Vanke to do “things they want to do.”

For the latest story on the tussle for control of Vanke, click here.

In an interview cited by the same Xinhua report, Yao Zhenhua, owner of Baoneng, said his purpose is to become a “strategic” Vanke shareholder and share the homebuilder’s returns. “When I had initial contact with Yao Zhenhua, he said Baoneng wanted to be a financial investor,” Wang was cited as telling Xinhua.

Both Baoneng and China Resources opposed a plan by Vanke to sell about $6.9 billion in shares to Shenzhen Metro Group as part of a restructuring plan to end what the developer has labeled a hostile takeover bid. Under the proposal, Shenzhen Metro would become Vanke’s biggest shareholder.

Wang said the proposal can still “move forward” although the process will take at least two to three months before a shareholders’ vote, according to the Xinhua report.

While Wang said Baoneng’s leverage ratio, or the amount of borrowed money relative to capital, may be above 20 times, Yao told Xinhua the leverage used by unit Shenzhen Jushenghua Co. to acquire Vanke shares is at a safe level of only 1.7 times. Internal stress tests showed that Baoneng can maintain “sound” cash flow and profitability in a worse-case scenario, according to the report that didn’t provide details of the tests.

Jushenghua is borrowing as much as 15 billion yuan ($2.2 billion) in a bond sale to repay about 8 billion yuan of debt and replenish working capital, according to a prospectus last month. The logistics property operator-turned financial holding company has a debt-to-asset ratio more than doubled to 75.5 percent as of Dec. 31 from a year earlier, as the company stepped up borrowing to finance investments, according to the prospectus.

Jushenghua’s debt has been rising “relatively fast,” profits are mainly derived from investment returns and therefore subject to market volatility, and potential risks to assets that have been used as collateral, including Vanke shares, “deserve attention,” according to the prospectus.

Baoneng affiliate Shenzhen Shenye Logistics Group canceled a private bond sale at the request of the Shanghai stock exchange, Caixin reported Friday, citing an unidentified person. The exchange asked the brokerage involved in the sale to investigate on concerns the proceeds will be used to replenish cash after Baoneng purchased Vanke shares, according to the report.

— With assistance by Dingmin Zhang

Before it's here, it's on the Bloomberg Terminal.