China Vanke – Is the Advancing Giant in Chinese Real Estate Falling Down?

Vanke is one of the largest real estate developers in China. It is considered a resilient, strong and advancing giant in the Chinese Real Estate industry.

However, in the recent month, the market has been worried about Vanke’s liquidity, and its bonds were sold off. The bond yields surged to over 30%. Vanke, together with its largest shareholder, Shenzhen Metro Group Co. (SZMC), held an investor meeting to boost investors’ confidence.

SZMC owns around 28% of Vanke shares. SZMC is a wholly-owned subsidiary of Shenzhen SASAC (深圳國資委). During the meeting, SASAC and SZMC provided a strong signal of support to Vanke and would help Vanke handle the industry downturn, including the below commitments and measures:

• SZMC declares that they have no plan to reduce its stake in Vanke.

• SZMC will acquire Vanke’s urban renewal projects of more than RMB 10 billion to inject liquidity.

• Shenzhen SASAC will coordinate with financial institutions to provide financing for Vanke.

• SZMC could potentially purchase Vanke’s bonds in the open markets.

These strong supports are out of the market expectation, so the market is quite positive on this news. The offshore bonds rebounded a lot, including “VNKRLE 5.350% 11Mar2024 Corp (USD)” increased to over $97 level.

For the developers in hybrid ownership (混合制), SOEs could treat these developers only as a part of their investment, instead of a key subsidiary, and thus it has the flexibility to allow them to default the debts (examples like the defaulted Sino-Ocean, Greenland and Central China). Nevertheless, Shenzhen SASAC and SZMC publicly announced that they will help Vanke to go over the down cycle, so the status or level of Vanke should likely be more important than other developers in a hybrid ownership. But we still consider Vanke’s SOE background not as strong as other developers with a central enterprise owning more than 50% stakes (such as China Resources Land, Poly Group and Jinmao).

In terms of operation, in the first ten months of this year, the total contracted sales were around RMB 312.4 billion, decreased by 10% YoY. The decline rate is slightly better than the top 100 peers’ with a 12% YoY decline. In the first three quarters of 2023, Vanke’s revenues from non-property development segments increased by 8.3% to around RMB 12.1 billion, driven by strong performances in the logistics segment and rental housing. However, this was offset by the weak operating performance of the property development. Under the property development segment, Vanke had a 17.4% YoY revenue decrease to RMB 244.2 billion and a weakening gross margin to 18.5% (versus 20.7% in the first three quarters of 2022).

The good news is that at least Vanke can generate a slightly positive operating cash flow of RMB 0.23 million, versus most of the developers recording a negative operating cash flow, meaning that those developers (not Vanke) have to burn cash in their development business while Vanke didn’t. Yet Vanke’s operating cash flow (in absolute terms) is weak, given the poor sales figures, large amount of housing units to be delivered and sticky taxes paid in cash, which means that the company could barely improve its credit profile.

The trends of weak performances in property development while having resilient results in the logistics and property investment segments are likely to continue in the short to medium term. Thus, there is little room for improvement in the operating cash flow.

In terms of credit profile, as of the end of September 2023, Vanke had RMB 101.2 billion unrestricted cash, including around USD 1 billion offshore cash. It had a total debt of RMB 324.5 billion. The net gearing ratio was increased to 54%, and the unrestricted cash to short-term debt ratio was 2.06x. The company was still able to access the onshore bond issuance and supported by bank refinancing.

We expect most of its short-term debt (~70% to 80%) can be rollover, with the exception of the offshore bonds matured in 2024, which have the outstanding amount of around RMB 10.4 billion. The company should have adequate internal resources to repay the 2024 bonds, so the default risk in 2024 remains under control.

To sum up, the short-term solvency of Vanke should be fine. But the industry outlook is yet to be clear, and we never know how long an industry downturn will last. If the situation persists, the bonds after 2024 remain a high credit risk.

For investors who are looking to bet a repayment of its offshore bonds, the 2024 bonds could be considered (see Table 1), which still have some room for capital gains. For longer-term bonds, investors should remain cautious. After Vanke repays all the 2024 bonds, investors could selectively and cautiously pick the next matured bond, VNKRLE 3.150% 12May2025 Corp (USD), on a rolling basis, which is subject to the situation at that moment.

Table 1: Vanke’s 2024 Bonds