Well-behaved Chinese property giant shows stress
Compared to over-indebted China Evergrande, teetering on the verge of collapse, state-controlled developer China Vanke is a model of financial propriety. With peers racing to acquire distressed rivals and home sales falling, the country’s third-largest real estate company is finally listing its property management unit, which could raise some $2 billion according to IFR.
Vanke Chairman Yu Liang has been predicting a real estate correction since 2018, and therefore steered clear of costly land grabs. His balance sheet held $22 billion in non-restricted cash as of June, per Fitch estimates, comfortably covering short-term debt. Such prudence has helped its bonds retain their investment-grade rating.
Yet the $32 billion company has dragged its feet in bringing its subsidiary Onewo public; most of its major competitors have listed their property services businesses already. It’s an attractive asset, pocketing 18 billion yuan in annual revenue. Operating profit soared 67% in the first half.
At one point a lofty valuation was possible. Online property brokerage Ke, for example, made a big splash listing in New York in August 2020, pricing above the target range.
Unfortunately much has changed since then, with Evergrande and other developers missing bond and loan payments while Beijing holds down property prices¸ depressing transaction volumes. Vanke managed to grow sales by 10% in the three months to September, but net profit attributable to shareholders plunged 23% year-on-year, after rising 7% in 2020. Operating cash inflow contracted over 150%.
Spinning Onewo off would add financial padding and give Vanke an M&A war chest to compete with rivals like Country Garden Services, which has begun snapping up smaller players to gain share. But it’s a tough time to be asking for a premium.
Onewo could be seeking a valuation of around $13 billion, equivalent to 28 times forecast earnings estimated by Jefferies analysts. By comparison Ke, which has lost 70% of its value this year as profit tumbles, trades at 26 times; Country Garden Services trades at 23 times. When it comes to cash, it’s better late than never, but Vanke may regret having waited so long to tap markets.