China Vanke

Vanke fires latest salvo in takeover battle with Baoneng

Housebuilder sends 8,000-word open letter to securities regulators accusing its largest shareholder of illegal fund raising

PUBLISHED : Tuesday, 19 July, 2016, 9:18pm
UPDATED : Thursday, 09 February, 2017, 1:02pm

China Vanke fired the latest salvo in its takeover battle with Baoneng Group on Tuesday, after filing a "open letter" with the securities regulators, accusing its largest shareholder of illegal fund raising as it increased its stake over the past year in the housebuilder.

Vanke’s A-shares have now tumbled almost 30 per cent since they resumed trading on July 4.

In the 8,000-word document, the nation’s largest homebuilder said Baoneng had borrowed from nine high-leverage asset management programmes (AMPs) to increase its stake in Vanke since late last year, which breached a number of regulations including the Securities Investment Fund Law.

Baoneng, through its unit Jushenghua and Foresea Life, now controls 25.4 per cent of Vanke.

As its shares continue to drop, the developer said there are huge question marks over whether Baoneng’s leveraged capital chain is sustainable.

They could trigger a crash in the company’s value and hurt the interests of many minority shareholders, said the letter, which was sent to four securities regulators including the country’s top supervisor, China Securities Regulatory Commission (CSRC).

“(Among the nine AMPs), six have incurred paper losses, and one is close to forced liquidation,” Vanke said.

Vanke, headed by chairman Wang Shi, also raised a further 12 problems existing with Baoneng’s funding activities, including incomplete disclosure of information, illegal off-balance sheet lending, and suspected share price manipulation, and urged the regulators to launch an examination of the issues and punish Baoneng.

Zhang Yuanzhong, a Beijing lawyer wrote in his blog on Tuesday that to accuse the company of price manipulation, Vanke needs to demonstrate Baoneng’s subjective intention of doing so.

He said evidence exists that Baoneng’s share purchase was for the sole purpose of taking control of Vanke.

An earlier Xinhua report unveiled that of the estimated 43 billion yuan of funds Baoneng used to purchase 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 AMPs, at four times leverage.

The CSRC, China Insurance Regulatory Commission and China Banking Regulatory Commission checked Beoneng’s funding resources at the end of last year, and their conclusion was that any risk was “controllable”, mainland financial media Caixin reported, citing a source close to the proceedings.

JP Morgan analysts, however, have warned that undue financial risks do surround the planned funding package.

They concluded last week, that there was risk of liquidation of Baoneng’s AMPs, if Vanke’s share price fell below 17.8 yuan, and any liquidation could lead to panic sentiment, and a crash in the company’s share price.

Banks may not be able to exit the AMPs, they added, meaning they too would be hurt.

Vanke closed at 17.14 yuan in Shenzhen on Tuesday.

Baoneng proposed in late June to remove all Vanke board members, including Wang Shi.

Despite the initial board rejection, Baoneng is still eligible to call a shareholders’ meeting by themselves based on Vanke’s company rules, which has left huge uncertainty over the company’s operations and outlook.

Vanke, in the letter, said that action had already negatively affected the company’s property sales and its credit ratings.