Across The Border

Vanke’s corporate battle signals opportunities in big property blue-chips

Intensifying ownership fight signals investment opportunities in China’s property sector, where big blue-chip companies may be undervalued

PUBLISHED : Wednesday, 23 March, 2016, 1:56pm
UPDATED : Friday, 15 July, 2016, 10:32am

There’s a new twist in one of China’s biggest corporate battles, creating additional uncertainty about the future of China Vanke, the nation’s largest and most iconic residential developer.

However, analysts said the intensifying ownership fight also signals investment opportunities in China’s property sector, as big blue-chip companies with industry-leading positions may be potentially undervalued and look increasingly attractive to investors.

Shareholders of China Vanke, the world’s largest listed property developer by market value, recently voted to continue the trading suspension on its shares in Shenzhen after Vanke announced an memorandum of understanding (MOU) to introduce subway operator Shenzhen Metro Group as its largest shareholder.

The move was widely seen as part of management efforts to block a potential hostile takeover bid by Baoneng Group, which replaced China Resources Group (CR Group) as Vanke’s largest shareholder in December, but was criticised as lacking credibility by Vanke’s chairman Wang Shi.

However, CR Group, which was Vanke’s largest shareholder from 2000 to 2015, doesn’t seem happy about the Shenzhen Metro move. Media reports quoted Fu Yuning, chairman of the state-owned CR Group, complaining that the deal between Vanke and Shenzhen Metro was not mentioned at the board meeting a day ahead of the announcement.

“Vanke is a very good company, with great influence in China’s property industry. The management team is also very professional,” Fu was quoted as saying in an interview over the weekend with, the news portal of Nasdaq-listed Tencent.

However, for “such a big deal [they didn’t mention it] at the board meeting on March 11th. But they announced it the following day with details including issuing shares for consideration, size of the assets, and the payment method. Is it appropriate?” Fu asked.

Meanwhile, media reports cited CR Group’s representative as saying the group has already filed a complaint with regulators about the MOU, demanding that Vanke comply with relevant rules.

Shares of Shenzhen-listed China Vanke had surged more than 70 per cent in the three weeks before their trading suspension on December 18, closing at 24.43 yuan (HK$29). The stock had more than doubled during last year compared with its price at the end of 2014.

Baoneng started the battle because they believe Vanke was undervalued
Chen Enzhi, economist

Analysts said the intensifying ownership battle indicated Vanke was very attractive in the eyes of investors.

“As a leader in the industry, Vanke has a lot of quality assets and a good reputation,” said Chen Enzhi, an economist and columnist based in Hangzhou. “Baoneng started the battle because they believe Vanke was undervalued.”

A recent Goldman Sachs report said Vanke’s long-term outlook is “promising” due to potential pent-up demand from China’s migrant population in the long run. The report added that the company’s management was also positive on retirement housing and the China outlook for reits (Real Estate Investment Trust) development.

Vanke posted better-than-expected results for 2015. Its net profit climbed 15 per cent year-on-year to 18.1 billion yuan, while its sales jumped 22 per cent to 261.5 billion yuan.

Capital Securities expected Vanke’s sales to continue to increase as Chinese authorities look determined to clear stockpiles of unsold property in mainland cities, labelling it as one of the most important economic tasks of the government in 2016.

The securities firm predicts Vanke’s net profit will increase by 14 per cent in 2016 to 20.6 billion yuan, with its price to earnings (PE) ratio expected to reach 13 based on the share price before trading was suspensed.

Vanke’s high-profile corporate battle has also drawn investors’ attention to the property sector. After the firm’s trading suspension, property sector stocks on the mainland jumped more than 8 per cent within a week, data from Shenyin Wanguo Securities showed.

Chen said A-share markets lack big blue-chips with quality assets like Vanke, which look increasingly attractive to investors as China pledges to reform and modernise the country’s capital markets, including a proposed registration-based IPO system.

“Blue-chips are scarce resources in Chinese markets,” he said, “Under China’s market environment, industry leaders with big size will benefit more from the scale effect. The stronger gets even stronger.”

China Merchants Securities also recommended that investors increase positions in blue-chip stocks in the property sector. In particular, it favours industry leaders with exposure to free-trade economic zones and top-tier cities, such as Poly Real Estate, Shenzhen Overseas Chinese Holding Company, China Union Holding, and Huafa Industrial Co.