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China property

S&P cuts Vanke’s credit outlook to ‘negative’ as boardroom tussle escalates

Tension among key shareholders may weaken the company’s business execution and financial discipline, S&P says

PUBLISHED : Wednesday, 24 August, 2016, 1:59pm
UPDATED : Wednesday, 24 August, 2016, 11:00pm

S&P Global Ratings cut its outlook on China Vanke Co. to “negative” from “stable”, citing increased uncertainty due to ongoing tussle in China’s largest residential property developer.

“We revised the outlook on China Vanke to reflect the increasing likelihood that the tension among the key shareholders and the management team could ultimately weaken the company’s steady business execution and good financial discipline,” S&P wrote on Wednesday. “The power tussle has lasted longer than we anticipated. In our view, there is no clear path to a resolution that could satisfy all stakeholders.”

The negative outlook, first by a major global credit rating agency, is the latest sign that the high-profile battle for control of Vanke has spilled over to affect its financial performance.

Over the weekend, Vanke reported an interim result that missed analysts’ estimates.

Contractors demanded to rescind and revise the terms and conditions of contracts that had been sealed, forcing Vanke to put 31 out of 70 projects on hold, in another sign that the shareholders’ tussle was beginning to weigh on operations, said the developer’s board secretary Zhu Xu.

The downgrade in outlook could potentially make it more costly for Vanke to borrow overseas, even as the developer’s debt level is low.

Vanke may also find it difficult to forge ventures with other developers, crucial in an industry where 70 per cent of land acquisitions are done in partnerships because of the large costs involved.

The fight for control of Vanke took a new twist in August when China Evergrande Group disclosed that it had gathered 6.8 per cent of Vanke’s Class A shares from open market purchases, displacing China’s Anbang Insurance Group to become the developer’s third-largest shareholder after conglomerate Baoneng Group and state-owned China Resources.

“We believe the emergence of a rival developer Evergrande as a meaningful shareholder increases the complexity of the evolving situation and creates additional uncertainty over the stability of the senior management team,” S&P said.

Vanke’s management board is due for election in March 2017, which creates a near-term risk if the developer’s major shareholders want to exert their influence on the company, S&P said. The agency will cut Vanke’s rating if the senior management team is replaced, and a more aggressive shareholder takes control, S&P said.

S&P has not downgraded Vanke’s “BBB+” long-term corporate credit rating and “cnA+” long-term Greater China regional scale, and maintained its rating on Vanke’s Hong Kong unit.

Vanke’s shares have jumped 92 per cent in the past 12 months on the Shenzhen bourse after trading was halted for six months pending the shareholders’ tussle. Its shares rose 25 per cent in Hong Kong over the same period.

As Vanke’s acquisitions, partnerships and the staff stability have all suffered various degrees of disruption over the past 12 months, Deutsche Bank said the company’s competitiveness will be impaired and its financial results will be affected.

The investment bank said near-term share price performance should still be driven by news flow about the shareholding feud, which may not necessarily reflect fundamentals. It maintained a “hold” position on the company.

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