China Vanke

What’s next for Baoneng and Evergrande after the tussle for Vanke?

Vanke’s board of 11 directors are due for re-election in March 2017, which may open up another battle front for dominance

PUBLISHED : Friday, 23 December, 2016, 4:43pm
UPDATED : Wednesday, 28 December, 2016, 10:35am

The year-long battle for China Vanke is likely to be over.

The developer’s share price fell 15.6 per cent in Hong Kong during the 12 months, declining 16.8 per cent in Shenzhen in the same period.

Chairman Wang Shi and his management team, who together control 8.41 per cent of Vanke together with the company’s union, are very likely to remain to run the developer, JPMorgan analysts Ryan Li and Karl Chan said this week.

“We believe this is what the government wants, given that Vanke is the largest taxpayer in Shenzhen, and directly impacts government revenue,” they said.

For the raiders Baoneng Group and China Evergrande Group, their leverage-funded buyout may exert pressure on their finances, analysts said.

Baoneng’s 43 billion yuan war chest was funded by insurance premium, 80 per cent of which came from Foresea’s universal life insurance product. That has since been banned by the insurance regulator to deprive Baoneng of its funding source.

It’s worse for Evergrande, whose debt-to-equity ratio is 400 per cent, making it one of the industry’s most indebted developers.

It’s already made 4.7 billion yuan in paper loss, as Vanke’s share price declined after its initial purchase. After spending 36 billion yuan amassing Vanke shares, Evergrande’s own share price hadn’t fared any better, falling 12.65 per cent from the time it declared its hand on August 15, to December 16 when it conceded it had no intention to control Vanke. That’s wiped out almost HK$10 billion in its market value.

The Chinese securities and insurance regulators rebuked Baoneng and Evergrande.

Their unusually strong language and punitive actions may end up protecting Vanke, as the insurance units of the two raiders will be under regulatory scrutiny if they ever tried to mount control, analysts said.

“Taking into account the regulator’s criticism, Vanke is unlikely to fall into either Baoneng or Evergrande’s hands, ” said David Hong, head of research at consultancy China Real Estate Information. “It may finally just become a government-controlled property entity.”

Still, some analysts believe the battle isn’t over.

Vanke’s board of 11 directors are up for re-election in March 2017, which could open up a new battle front for dominance.

Neither Baoneng with its 25.4 per cent stake, nor Evergrande with its 14.07 per cent holdings, has a seat on Vanke’s board. China Resources, the second-largest shareholder with 15.29 per cent, has three seats.

The fight isn’t over “until the board is re-elected and the current management gets the support and blessing of all of those in the cross hairs,” said Brett McGonegal, chief executive of Capital Link International Holdings.