China Vanke

Evergrande’s perfect move, or a move too far?

Analysts divided on surprise purchase of 4.68pc stake in Vanke

PUBLISHED : Friday, 05 August, 2016, 8:08pm
UPDATED : Friday, 05 August, 2016, 8:08pm

China Evergrande Group’s surprise entry in the high-stakes battle for control of China Vanke is a bold step towards billionaire Hui Ka-yan’s property empire becoming the country’s largest residential property developer, according to some analysts.

But others say they worried that such investment could hurt the interests of Evergrande’s own stakeholders.

The Guangdong-based developer bought a 4.68 per cent stake in Vanke on Thursday, nearing the 5 per cent ownership threshold at which the company could request a seat on the board of the nation’s biggest homebuilder.

“Evergrande has always wanted to become China’s largest developer and Vanke’s chaos has provided it an opportunity,” said Chu Tongxin, a property analyst at Shenzhen Anji Asset Management, adding the stock purchase could allow it to grab market share from Vanke.

Evergrande was second among all real estate developers by house sales in 2015, after Vanke.

Vanke’s shares in Shenzhen soared another 6.5 per cent on Friday, after hitting its 10 per cent limit on Thursday, while Evergrande’s stock jumped as much as 5 per cent in Hong Kong.

“Evergrande is hoping to have influence in Vanke, and we expect this will eventually turn into a strategic investment,” according to a note by JPMorgan analysts.

“Evergrande has a track record of hostile takeover attempts,” they added.

“We will not be surprised if this is another attempt, given Vanke’s management is now busy dealing with the deadlock between China Resources and Baoneng.”

The eight-month long battle for control of Vanke began when the privately owned insurer Baoneng displaced state-owned China Resources as the homebuilder’s largest stakeholder last year.

Vanke’s chairman Wang Shi claimed it was a “hostile takeover” and proposed to bring in Shenzhen Metro as a ‘white knight’ this June to dilute Baoneng’s shares. However, the proposal was opposed by both Baoneng and China Resources.

The fight has also drawn the close attention of the securities regulator, which is concerned over irregularities in the takeover tussle.

On Friday after trading, the Shenzhen Stock Exchange issued letters to Vanke questioning if the company selectively disclosed Evergrande’s stake purchase deal, and if Evergrande had misled the market by denying the deal was taking place, before confirming it was.

“Although Evergrande posted strong contracted sales, its margin is one of the lowest in the sector, plus its leverage is high. The investment in Vanke could bring risk to Evergrande’s shareholders and debtholders,” said Danny Bao at Hong Kong-based HJY Capital Advisors.

“The valuation of Vanke now is one of the highest in the sector given its price to book ratio is more than 2,” Bao added.

Known for his aggressive business style and close relations with some of Hong Kong’s biggest tycoons, 57-year-old Hui ranked as China’s richest man in 2009. He is currently listed as seventh richest, according to Forbes, with net worth reaching US$2.3 billion.