Shaky Vanke finds stabilizing friend in Shenzhen government 

Shenzhen SASAC and Shenzhen Metro Group offered the hometown property champion their support after investors worried about its ability to repay its debt

Key Takeaways:

• Vanke has no more overseas debt coming due this year, but could face challenges in 2024 as 11 billion yuan in three tranches of overseas debt matures
• The company believes pressure caused by falling sales and rising supply in China’s property market over the last two years will ease in the second half of next year

By Ken Lo

First it was Evergrande (3333.HK), then Country Garden (2007.HK). Now, everyone is trying to guess who among China’s debt-challenged real estate developers will be next to fall into crisis.

Once a pillar of stability in the country’s property sector, China Vanke Co. Ltd. (2202.HK; 000002.SZ) has found itself sucked into the industry’s maelstrom. Fitch Ratings downgraded some of Vanke’s bonds from BBB+ to BBB on Oct. 17, causing the price of its offshore dollar bonds to tumble as worried investors dumped the notes. More than a week later, the company released new financials that showed double-digit declines for its main operating and profit indicators in the third quarter, adding to the concerns. 

By early November, prices had tumbled for $1.23 billion worth of its dollar bonds coming due in March and June next year, as they traded at 70 cents to 80 cents on the dollar. The company’s Shenzhen- and Hong Kong-listed shares also plunged to multi-year lows. 

In a rush to avoid becoming the next Evergrande or Country Garden, Vanke called an urgent online meeting on Nov. 6 attended more than 150 worried financial institutions. In a key show of support, the event was also attended by top officials from two of Vanke’s hometown supporters, the powerful Shenzhen State-owned Assets Supervision and Administration Commission (SASAC) and local subway operator Shenzhen Metro Group.

Government support

Shenzhen SASAC said that Vanke had no financial or management risks, adding that the company had various tools at its disposal to help it through any future difficulties. It added that Vanke could sell some of its projects in major cities or bring in new partners if necessary to raise new cash. In addition, it said Vanke could depend on state-owned enterprises like Shenzhen Metro and the ones overseen by Shenzhen SASAC to buy its debt on the open market, and other state-run financial institutions could be called upon to inject more financing into the company.  

Shenzhen Metro, which holds 27.2% of Vanke’s Shenzhen-traded A-shares, stressed that it would continue to hold its Vanke stake, according to the subway operator’s Chairman Xin Jie. He added that the subway operator had more than 10 billion yuan ($1.37 billion) it could inject into Vanke to take over some of its Shenzhen-based urban renewal projects if necessary. 

The signs of support from two major Shenzhen government-linked entities came as Vanke itself promised to continue servicing its domestic and foreign debt in timely manner. Those strong signals sparked a rally for Vanke’s A-shares, which rose more than 6% at one point, while the company’s Hong Kong-listed shares jumped as much as 10%, before later giving back some gains.

Morgan Stanley upgraded Vanke’s Hong Kong shares to “market perform ” from “underweight,” but said the company’s long-term prospects would depend on how China’s property market fared. JPMorgan said the news should help to stabilize Chinese property stocks over the short term. But it added that Vanke’s sales and profit performance are relatively weak and its stock price isn’t attractive, which could lead it to underperform other real estate companies.

Vanke had seven tranches of overseas debt totaling about $3.22 billion as of Nov. 5, according to Wind Data. In its discussion of this year’s interim results, Vanke’s management indicated that there was no more overseas debt coming due this year. It said three tranches of debt will mature next year, including a $630 million bond due in March, a 1.45 billion yuan bond due in May and a $600 million bond due in June, totaling about 11 billion yuan. 

On its hastily convened call earlier this month, Vanke said it had 103.7 billion yuan in cash and cash equivalents at the end of September, with resources to cover its short-term debt by 2.2 times. Based on its current obligations, the company said it thinks it can comfortably pay off its maturing debt next year with its own funds and some overseas borrowing. That seems to show the company’s situation is under control for the short- to medium-term, though its longer-term prospects remain to be seen.

Weak third quarter

Vanke reported operating revenue of 290 billion yuan in the first three quarters of this year, down by a relatively mild 14% year-on-year, while its profit fell by 20.3% to 13.6 billion yuan, also outperforming many of its weaker peers. But the company’s situation was clearly worsening in the third quarter, with operating revenue down 31.6% year-on-year to 89.4 billion yuan, and a 22.5% decline in its quarterly profit to 3.75 billion yuan.

Unlike many of its peers that have struggled to complete their property developments due to lack of funds, Vanke was one of the few companies to actively expand its business over the last two years. This year alone it added 39 projects to its portfolio, which now includes projects worth more than 814.7 billion yuan, accounting for more than half of its total assets. 

The company will continue to have strong need for new capital. It was planning to raise up to 15 billion yuan through a private placement of 1.1 billion A-shares in February, but ultimately abandoned the plan in August due to weak market conditions.

Despite that, management said Vanke already raised more than 85 billion yuan in new financing in the first 10 months of this year, and the average interest rate for its new domestic financing was only 3.64%. At the end of September, Vanke’s assets-to-liabilities ratio was 75.3%. Without the assuring words from its two Shenzhen government-linked benefactors, the company would have undoubtedly faced more difficult accessing such financing. 

Sluggish sales continue to be a challenge for Vanke. The company said its contracted sales in the first 10 months of the year totaled 312.4 billion yuan, down 9.9% year-on year. 

Despite strong demand in the domestic housing market and numerous supportive measures from the central and local governments since August, the greatest challenge for developers now is a lack of consumer confidence, Chairman Yu Liang said when talking about the real estate market’s prospects. He added the market correction will take some time to run its course, and that things probably won’t improve until the second half of next year. 

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