China Vanke

Baoneng’s leveraged buy-up of China Vanke shares under pressure as regulator bans universal life sales

About 80 per cent of Baoneng’s insurance income is from universal life products, sales of which have been suspended by the Chinese Insurance Regulatory Commission

PUBLISHED : Tuesday, 06 December, 2016, 9:46pm
UPDATED : Tuesday, 06 December, 2016, 10:59pm

Baoneng Group’s highly leveraged attempt to take control of China Vanke is facing mounting pressure after the insurance regulator banned sales of its core universal life insurance product.

The move comes after the chairman of China’s securities regulator railed against companies that undertake hostile buyouts by using illegal funds over the weekend, and analysts say the stake-chasing game in the takeover battle for Vanke, the country’s largest home builder, is likely to end.

On Monday night, the Chinese Insurance Regulatory Commission (CIRC) suddenly suspended sales of the new universal life product offered by Foresea Life, a subsidiary under Baoneng Group, citing non-compliance activities.

“About 80 per cent of Baoneng’s insurance sales come from universal life insurance. The suspension will be a big blow to the company,” said Jerry Li, an insurance analyst at China Merchants Securities. Universal life products, which deliver short-term, high returns have proved a big hit with Chinese investors since the stock market crash in 2015, and have become the main source of funding for many insurers, including Baoneng.

In order to achieve high yields, insurance companies have been aggressively bidding for stakes in listed firms, sometimes using complicated leveraging arrangements to do so.

Regulator suspends product sales of insurers branded ‘barbarians’ for hostile buyouts

This trend has raised fears among regulators concerned that the whole insurance sector is exposed to the risk of a mismatch between the insurers’ equity investments and their promised payouts.

Baoneng spent more than 40 billion yuan to acquire 25.4 per cent of Vanke’s shares over the past year, making it the developer’s largest shareholder. The necessary capital has been largely raised through universal life premiums and leveraged funding, and its shares in Vanke face a lock-up period until next July.

Li said although Baoneng’s current repayment schedule is not overwhelming, it could face serious capital pressure if there is a massive surrender by policyholders because of the recent ban imposed by the regulator.

Meanwhile, CIRC also suspended online sales by six insurers including Foresea Life and Evergrande Life, which is owned by China Evergrande Group.

Evergrande Group and its units were accused by the Shenzhen stock regulator earlier this month of engaging in short-term speculation in a handful of stocks including its rival Vanke that caused a significant swing in the latter’s share price and trading volume.

Evergrande joined the takeover tussle for Vanke in August and has built up a 14 per cent stake in its industry rival, becoming the firm’s third largest shareholder.

Analysts say the latest punishments introduced by CIRC will serve as a real warning to companies making aggressive investments in the mainland A-share market.

“Vanke shares will be under pressure in the short term as the major shareholders are likely to hold back from equity competition,” said Liu Feifan, a property analyst with Guotai Junan Securities.

Vanke shares in Hong Kong declined 2.3 per cent on Tuesday, following a 7 per cent slump on Monday, while its shares in Shenzhen fell 0.47 per cent on Tuesday, after a 3.59 per cent drop on Monday.

UOB Kay Hian downgraded Vanke to ‘sell’ on Tuesday. “The stake-chasing story of China Vanke (both A-share and H-share) will no longer be a key catalyst to its share price,” said UOB Kay Hian analysts.

“We suggest turning more cautious and foresee greater downside risk for Vanke once the official restrictions on insurance capital are released, given that this would compound sell-off sentiment.”