China Vanke

The driving force behind Baoneng’s assault on Vanke

Shenzhen tycoon Yao Zhenhua’s bid to take over China’s biggest housebuilder is his boldest, and arguably most aggressive, move yet

PUBLISHED : Friday, 15 July, 2016, 10:00pm
UPDATED : Monday, 18 July, 2016, 2:44pm

Until late last December, Baoneng Group was largely a little-known Guangdong business.

But since then, it has very quickly emerged from the corporate shadows, after launching an unsolicited bid to take control of China’s largest housebuilder, China Vanke, triggering what has now become one of the country’s most intriguing and dramatic takeover battles.

Baoneng is actually a burgeoning network of some 40 subsidiaries, covering real estate and logistics, microfinance, education, healthcare and most-crucially insurance.

And just as secret as the business itself, very little is know too of its equally low-profile chairman, Yao Zhenhua.

“Yao is super ambitious,” one person close to Baoneng, told a mainland financial newspaper, “and he wants to create a financial empire like Anbang Group.”

It might be a surprise to many to realise, but the 46-year-old Yao is already ranked 84 on Forbes China’s rich list, with a net worth of US$1.9 billion.

Yao is super ambitious and he wants to create a financial empire like Anbang Group
A source close to Baoneng, quoted by a mainland financial newspaper

Born in 1970, his childhood was spent in Shantou, Guangdong province, a close-knit community renowned for producing bold business leaders.

Hong Kong billionaire Li Ka-shing is also a Shantou native.

Yao graduated from South China University of Technology, one of the region’s best universities, in 1992, and the same year, after a brief spell working for a state firm, he followed the entrepreneurial spirit of so many in Shenzhen at the time, and launched his own firm in the city.

His first pot of gold was created in the food industry.

Encouraged by the Shopping Basket Programme, a national initiative open to private businesses to promote the creation of more fresh food outlets in local communities, he started his own farm and eco-supermarket — a hugely innovative move at the time, as it created its own food production chain.

The business soon became one of Shenzhen’s largest fresh vegetable suppliers.

It was renamed Baoneng in 2000, and expanded quickly into other areas, especially real estate development.

Three years later, Baoneng took a major stake in Shum Yip Logistics, a firm owned by Shenzhen government, reportedly in financial trouble.

After a series of disputes among shareholders, Yao was allowed to take control of various assets giving him a number of valuable land parcels and properties.

The company’s headquarters is still in the Shum Yip Logistics building, and it was that series of land deals which eventually propelled the company’s value, as China’s property boom continued through the 2000s.

“Shenzhen Baoneng All City”, a residential-commercial complex launched in 2005, is considered Yao’s most successful project, and he has since copied the model in 30 Chinese cities.

But experts say the company’s expansion is still modest, compared with that of certainly his most audacious target so far, China Vanke.

“Baoneng Real Estate once wanted to go public, but failed as its property assets were not that attractive and involved many redevelopment projects (in Shenzhen), which are often seen as politically sensitive,” said one anonymous analyst, familiar with the Baoneng story.

Heavy exposure in China’s second- and third- tier cities also put pressure on its growth in recent years, as the market slowed due to a growing oversupply in smaller cities.

But again, the creative Yao sensed another business opportunity from the situation.

In 2012, the China Insurance Regulatory Commission granted him a license to establish Foresea Life Insurance, which in China is called Qianhai Life, named after the new special economic zone in Shenzhen which is a test bed for China’s financial reforms.

The business took off, jumping from 53rd largest life insurer by premiums in 2012, to 11th last year, with revenues of 78 billion yuan.

Using universal insurance, this kind of short-term, high-cost financing to make long-term investments could bring credit risks to the entire industry
Jerry Li, an insurance analyst at China Merchants Securities

And it is this move into the insurance industry, which has since raised the company onto a different level, and now forms the core of its future ambitions.

The secret to its explosive growth, say experts, was its “universal insurance” products, which combine death protection with a short-term investment benefits. It became effectively a bancassurance business which operated under shadow banking rules, and which delivered high returns.

Foresea Life then obtained a property insurance license last year, after taking advantage of a new policy encouraging insurers to register in the remote Xinjiang province.

‘Cooperating’ or ‘in concert’, just how close are Baoneng and China Resources?

The new insurance arm has allowed Yao to access more capital to expand his fast-growing empire.

By June this year, Foresea Life and its parent Jushenghua had snapped up more than 5 per cent of the shares in nine Hong Kong or mainland listed companies, including China Vanke.

Jushenghua’s financial position improved significantly as a result, with its total assets surging from 28.3 billion yuan in value in 2014, to 260 billion yuan by the end of 2015.

Baoneng owns 67 per cent of Junshenghua, which holds 51 of Foresea Life.

Since late 2015, Baoneng, through Jushenghua and Foresea Life, has steadily been increasing its stake in Vanke.

It overtook China Resources Group to become its largest shareholder last December.

Vanke chairman Wang Shi reacted angrily to the unsolicited bid, labelling it a “hostile takeover” and the company applied for a suspension in trading of its A-shares on December 18.

On July 4, the developer resumed trading after the proposed introduction of Shenzhen Metro as a “white knight” investor.

But Baoneng opposed the deal and recently requisitioned to remove all the current board members including Wang. Baoneng bought more shares shortly after the trading resumption, and now controls a 25 per cent in Vanke.

Jerry Li, an insurance analyst at China Merchants Securities, said what has aroused the greatest suspicion over Baoneng’s move on Vanke, are its aggressive and risky funding methods.

“Using universal insurance, this kind of short-term, high-cost financing to make long-term investments could bring credit risks to the entire industry,” said Li.

A recent Xinhua report unveiled that of the estimated 43 billion yuan of funds used to purchase its Vanke shares, 10.4 billion came from Foresea Life’s premium income, 6 billion was in cash and 26 billion was borrowed from banks through asset management plans, at four times leverage.

But that leverage is very much in question, with Vanke’s Wang claiming it could even be 20 times.

In a latest move, Baoneng has now pledged part of its Vanke shares, to fund the deal.

Other question marks exist over the structure of the deal, say experts, especially is whether insurance products and bank deposits should actually be allowed to be so heavily invested in equities.

Many suggest that Baoneng’s case has exposed a series of grey areas, too, in China’s financial system which need much closer scrutiny and tighter risk management.

In a rare interview, with Xinhua, Yao said his purpose is to become a “strategic” Vanke investor and share in the homebuilder’s returns.

“Baoneng has many financing channels and different partners,” added one anonymous analyst.

“In fact, its(strategic) direction is pretty similar to state-owned enterprises.”

In an equally intriguing latest twist, Shantou’s Communist Party boss led a group of more than 30 influential native Chaoshan businessmen on a visit to the Baoneng headquarters on July 8, apparently in a show of support for Yao.

Is a whole new chapter in the battle of Vanke about to begin?