Feng Li
Shenzhen SASAC and Shenzhen Metro Group offered the hometown property champion their backing after investors became concerned about its ability to repay debt.
First it was Evergrande (OTC:EGRNQ)[3333.HK]then Country Garden (OTCPK:CTRYF)[2007.HK]. Now, everyone is trying to guess which of China’s debt-challenged real estate developers will be next to collapse.
Once a pillar of stability in the country’s property sector, China Vanke Co., Ltd. (OTCPK: CHVKY)(OTCPK: CHVKF)[2202.HK; 000002.SZ] has found itself immersed in the maelstrom of industry. Fitch Ratings reduced some of Vanke’s bonds from BBB+ to BBB on Oct. 17, sending the price of its offshore dollar bonds tumbling as jittery investors dumped the notes. More than a week later, the company was released new finance that showed double-digit declines in its key operating and profit indicators in the third quarter, adding to concerns.
From early on In November, prices had fallen for $1.23 billion of its dollar bonds due in March and June next year, as they traded at 70 cents to 80 cents on the dollar. The company’s shares listed in Shenzhen and Hong Kong also fell to multi-year lows.
In a rush to avoid becoming the next Evergrande or Country Garden, Vanke called an emergency online meeting on Nov. 6, attended by more than 150 concerned financial institutions. In a key show of support, the event was also attended by senior officials from two of Vanke’s city backers, the powerful Shenzhen-owned Assets Supervision and Administration Commission (SASAC) and local subway operator Shenzhen Metro Group.
Government support
Shenzhen SASAC said Vanke had no financial or managerial risks, adding that the company had various tools at its disposal to help it through any future difficulties. He added that Vanke could sell some of its projects in major cities or bring in new partners if needed to raise new money. In addition, he said Vanke could depend on state-owned enterprises such as Shenzhen Metro and those overseen by Shenzhen SASAC to buy its debt on the open market, and other state-owned financial institutions could be called upon to inject more funding into the company. . .
Shenzhen Metro, which holds 27.2% of Vanke’s Shenzhen-traded A shares, stressed that it will continue to hold its stake in Vanke, according to the metro 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 on some of its Shenzhen-based urban renewal projects if needed.
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 a timely manner. Those strong signals sparked a rally for Vanke shares, which rose more than 6% at one point, while the company’s Hong Kong-listed shares jumped as much as 10%, before later reversing some profits.
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 performed. JPMorgan said the news should help stabilize Chinese property stocks in the short term. But he added that Vanke’s sales and profit performance are relatively weak and its share price is unattractive, 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 discussing this year’s interim results, Vanke’s management indicated that it had no more overseas debt maturing this year. He said three debt tranches 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. , with a total of about 11 billion yuan.
In its hastily called 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 liabilities, the company said it thinks it can easily pay off its debt maturing next year with its own funds and some overseas borrowing. This seems to indicate that the company’s situation is under control for the short to medium term, although its long-term prospects remain to be seen.
Weak third quarter
Vanke reported operating income of 290 billion yuan in the first three quarters of this year, a relatively slight decline of 14% year-on-year, while its profit fell 20.3% to 13.6 billion yuan, also outpacing much of her weaker colleagues. But the company’s situation was clearly deteriorating in the third quarter, with operating income down 31.6% year-on-year to 89.4 billion yuan and a 22.5% drop in its quarterly profit to 3.75 billion yuan.
Unlike many of its peers who have struggled to complete their property developments due to a lack of funding, Vanke was one of the few companies that actively expanded its business over the past 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 be in dire need of 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 eventually abandoned the plan in August due to weak market conditions.
Despite this, management said Vanke has already raised more than 85 billion yuan in new financing in the first 10 months of this year, and the average interest rate on its new domestic financing was only 3.64%. At the end of September, Vanke’s asset-to-liability ratio was 75.3%. Without words of assurance from its two benefactors linked to the Shenzhen government, the company would undoubtedly have faced a more difficult time accessing such financing.
Slow 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 support measures from the central and local governments since August, the biggest challenge for developers now is a lack of consumer confidence, chairman Yu Liang said when talking about the outlook for the property market. real estate. He added that 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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