Vanke gets some help but is it too late too little?

Our speculations last month that the local Shenzhen government might be considering a takeover of Vanke came true around lunar new year, but should USD keepwell bondholders be so happy?

The bellwether Chinese developer announced on 27 January that Shenzhen SASAC owned, Shenzhen Metro Group (SZMC) board representative Xin Jie will take over as Chairman and in effect demoting long-time Chairman and Vanke lifer Yu Liang. While we watched the fireworks over Victoria Harbour, Shenzhen SASAC executives were already taking over key executive positions across the developer to assess viability for a bailout (see China Real Estate Business, 6 February).

This isn’t the first time a local government or SOE have tried to bailout a developer. Bailouts of mixed-ownership developers Greenland Holdings and Sino-Ocean Group failed because their backers were only prepared to bridge a liquidity problem but instead walked away when they found them insolvent. The last time we remembered a successful bailout of a developer was Greentown more than a decade ago, and none so far in the current downcycle.

Shanghai government - through Shanghai Chengtou (上海城投) and Shanghai Real Estate (上海地产) lent CNY 4.45bn to Greenland between August and September 2022 (see Greenland reports big but largely unusable end-June cash pile – Analyst Snapshot, 8 September 2022), but then didn't provide further support after Greenland proposed in end-October 2022 a term out of its USD 3.241bn bonds across nine tranches, which was completed on 25 November 2022.

China Life provided up to CNY 10bn liquidity support since 2022 to Sino-Ocean in the form of asset acquisition, subscription of bonds and onshore ABS issued by Sino-Ocean but stopped support in August 2023 when the developer termed out onshore bonds.

The question which needs to be answered in the coming months by Vanke’s new Shenzhen SASAC backed executive team is whether the company is solvent. After all, the formerly investment grade developer was China’s?third-largest developer in 2023 by attributable contracted sales?after central SASAC-backed developers?Poly Real Estate?and?China Overseas Land & Investment.

At least for now, we think that Vanke is at “Phase 1” of earlier Greenland and Sino-Ocean situations when their SOE shareholders still believe it is just a matter of liquidity, implying that Vanke’s shorter dated bonds such as the USD May 2025s and domestic MTNs/bonds due by summer should be money good. The tone from the top leaders towards real estate is also marginally better this year and thus Vanke’s SOE shareholder may be more patient and willing to offer more support before giving up.

We and probably many others can’t be sure whether Vanke's problem is really just "liquidity". Vanke’s SOE backers might eventually run out of patience if its new executives in place across the organisation finds larger than expected off-balance sheet arrangements – like in the case of Sino-Ocean - and that a bailout would cost more than the local municipal government can afford. Notably, we think that it is very unlikely that the Guangdong or central government will come to the rescue at this late stage.

Indeed, even before the new SOE-backed management is fully in place, Vanke warned of a CNY 27bn 4Q24 net loss to shareholders as they recognised sales with lower than expected ASPs and impair inventories and undisclosed financial investments. Vanke reported CNY 17.9bn net loss to shareholders in 9M24, bringing total expected 2024 net loss to CNY 45bn, a stark deterioration from CNY 12.2bn profit in 2023.

We wrote in May 2024 that the company’s receivables and payables balances from and due to related parties shows a worrying trend: they are significantly higher than that of performing comparable state-backed developers, albeit still lower than stressed/defaulted ones.?Vanke has had its fair share of controversy. In response to market rumours, the developer in a?14 April 2024 investor-relations event?said a?police investigation?against its Jinan, Shandong, branch general manager Xiao Jin was related to undisclosed personal matters and that local authorities in November 2023 decided to not file a case against subsidiary?Yantai Vanke?after a local partner accused the company of embezzlement. The developer also denied chatter at that time that its management is restricted from?travelling overseas.

Whatever the outcome on the off-balance sheet arrangements, one thing to ensure that Vanke is indeed solvent is for the new management to restore confidence especially for homebuyers. Albeit still early days and somewhat impacted by the lunar new year, Vanke’s January contracted sales was just CNY 11bn (per CRIC data), down 43% YoY. In comparison, CRIC shows that January sales for the top 100 developers declined by only 3.2% YoY. For 2024, Vanke’s contracted sales was CNY 246bn, down 35% YoY, steeper than the 28% decline for the top 100 developers.

If Vanke does fall into restructuring, USD bondholders face an arduous fight if holistic restructuring of its many of its peers are any guide - former giants such as?Country Garden,?Shimao Group,?Sino-Ocean Group,?China SCE Group?and?Logan Group?are still yet to complete holistic offshore debt restructurings (i.e. both offshore bond and loan facilities being restructured) despite defaulting for the first time on offshore debt between 2022 and 2023 (see latest distressed property tracker, 27 January).

Vanke’s USD bonds issued by Vanke Real Estate (Hong Kong) with only a keepwell from the Shenzhen-listco are structurally subordinated to all the onshore debt which appear to be getting more senior by the day as the developer’s external guarantees – presumably debt - increase. Perhaps one saving grace is that Vanke Real Estate (Hong Kong) holds the developer’s 21.46% stake in Singapore-based logistics-warehouse and Internet data centres (IDC) investor and operator GLP Pte which it acquired via a 2018 take-private at ~USD 2.5bn. Still that doesn't mean that USD bonds will get everything if GLP is sold - Vanke reported ~CNY 55.3bn (USD?7.8bn) in offshore debt including USD bonds as of end-June 2024.

By Dominic Soon, CFA and William Jing