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Power tussle hurts operations, says China Vanke

Director Wang Wenjin, second from right, and Company Secretary Zhu Xu, right, announced China Vanke’s first-half results on Aug. 22. (Photo by Joyce Ho)

HONG KONG -- China Vanke, which on Monday made "workforce stability" its top priority for the first time since foundation, said that the ongoing power struggle for control over China's largest homebuilder had put its operations in limbo.

"The impact of the issue around shareholder control on the company's operations has been increasingly visible, especially after June," Zhu Xu, Vanke's company secretary, told reporters on Monday. She was referring to almost all aspects of the business, from sales to new land acquisition to funding costs and employee retention.

Vanke's turmoil began in December when a consortium led by Baoneng Group -- a little-known private property and insurance conglomerate based in Shenzhen -- built its stake in Vanke in the A-share market to more than 25.4% from just 5% in July 2014, and displaced state-owned China Resources as Vanke's biggest shareholder.

Soon after Baoneng's attempt to dismiss Vanke's board of directors in July, Guangzhou-based property developer China Evergrande Group joined the fray by building a substantial stake of close to 7% and became the third-largest shareholder.

Zhu said: "Certain business partners were concerned that the company is losing its brand recognition, management, financing advantage, and therefore proposed to alter the terms of cooperation. Some even made requests to terminate their contracts with us. This has shrouded potential projects in greater uncertainties."

She pointed out that 31 out of 70 contracted projects came under such threats in the short period between end of June and early August; five projects under negotiation had been suspended.

Furthermore, the uncertainties have also meant that Vanke was finding it hard to forge new partnerships, which are crucial to the business as over 70% of land acquisitions were made jointly with other entities.

Taking their cues from both international and domestic credit rating agencies, which are ready to downgrade Vanke's rating, banks raised their lending requirements and lowered the company's credit limits. "Some of our long-term upstream business partners have likewise demanded shorter payment periods," said Zhu.

The long-drawn wrangle is also casting a shadow over the perception of Vanke's products and services. "Customers are more hesitant about buying our products. It is particularly evident for high-end residential projects and commercial office buildings," noted Zhu.

But above all, crushed staff morale was the most worrying, according to Zhu. "Our staff is worried and perplexed by the company's prospects. This has prompted a lot of our peers to aggressively poach our employees via headhunters. Our turnover rate between June and July was markedly higher," said Zhu, adding that recruitment was getting tough as well.

Zhu's remarks were made at a press briefing on Vanke's interim results, from which Founder and Chairman Wang Shi and President Yu Liang were both absent. Yu was busy dealing with the shareholder conflict, explained Zhu.

The power struggle took a new twist late-July when China Evergrande hurriedly built its stake in Vanke in the A-share market. With an interest of 6.82% to date, Evergrande has displaced Anbang Insurance Group, most famous for buying Waldorf Astoria New York hotel for $2 billion two years ago, to become Vanke's third-largest shareholder after China Resources.

Evergrande's abrupt entrance into the tussle had once been construed as a "political" move. Local online news portal previously reported that China Insurance Regulatory Commission had commanded Evergrande Chairman Xu Jiayin to purchase 51% of Vanke's shares at all costs in order to seize control of the company from the Baoneng consortium. But both the regulator and Evergrande dismissed the speculation as "totally groundless" last Saturday.

Xu's close allies, Cheng Kar-shun, chairman of Hang Seng Index constituent New World Development, and Cheung Chung-kiu, chairman of Hong Kong-listed C C Land Holdings, further complicated matters in early August by buying Vanke's H-share. Their stakes amounted to 0.14% and 0.94% of Vanke's current total outstanding share capital respectively.

Vanke said it had no clue what Everngrade's motive was. "We've been asking them about their intention in buying our shares, but they have never replied," said Wang Wenjin, Vanke's director.

Stalled transaction

The chaos has frustrated Vanke's plan to buy assets from state-owned urban rail transit manager Shenzhen Metro Group through a 45.6 billion yuan ($6.86 billion) rights issue, a deal that would make the latter the largest shareholder with a 21% stake.

"We're very sorry that no consensus among shareholders has been reached yet," said Zhu, who emphasized that the "railway-plus-property" model is "of utmost importance" to Vanke's development and that the company would not give up on the deal.

In spite of the potential to boost Vanke's land bank by 1.8 million sq. meters, the transaction has been rejected by both the Baoneng consortium and China Resources. Allegedly, the two players were complicit in toppling Vanke's board, according to Hua Sheng, an independent director of Vanke, who microblogged his claims in July.

The scramble for land and stiff market competition had led to a spike in sales costs and margin compression. Vanke's profit margin from property development, which made up 96.9% of the group's income, narrowed by 3.62 percentage points to 18.56% in the first half, as costs of sales jumped more than 57%.

The company also attributed the decline in margin to the "booking" of sales of lower-margin properties in cities such as Changsha, Hangzhou, Wuxi, Shenyang, Chongqing, Ningbo and Xi'an. It is hoping that overall margin for the full-year will rebound to last year's level at 21.13%.

For the six months ended June, Vanke's net income rose 10.42% to 5.35 billion yuan from a year ago. Total revenue surged 48.55% from a year earlier to 70.75 billion yuan on the back of a 70% leap in property sales to 190.08 billion yuan.

Its Hong Kong-listed shares closed up 1.73% at 20.6 Hong Kong dollars ($2.66) on Monday after the earnings reports, paring this year's loss to 10.04%. Its Shenzhen-listed shares traded up 0.45% at 24.7 yuan on the same day, taking the gains to date to 1.11%.

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