27 February 2020

Why Vanke has had a change of heart

When asked if he had any plans to diversify his business strategy, Vanke (000002.CN) chairman Wang Shi {王石} answered a categorical “no”.

“Wait until I die,” he was famously quoted as saying.

That was before Vanke piled HK$3 billion (US$386 million) into Huishang Bank Corp. (03698.HK), a regional commercial bank, making it a cornerstone investor in the lender’s upcoming initial public offering in Hong Kong.

It’s the biggest investment for Vanke outside its core property business. When the deal is completed, Vanke could be Huishang’s biggest shareholder.

Why the change of heart?

Vanke would not be drawn but judging by the trend, banking assets are becoming increasingly popular among property developers. For instance, Yuexiu Group, parent of Yuexiu Property (00123.HK), has acquired a majority stake in Hong Kong-based Chong Hing Bank (01111.HK).

Analysts see these developments as emblematic of the challenges in the property market, already one of the most highly regulated sectors of the economy. Property developers might be seeing the early signs of a slowdown from a new round of tightening as home prices continue to rise.

But most likely, in the case of Vanke at least, the move on Huishang Bank is an investment in the future.

Huishang Bank is the biggest city commercial bank in the western and central regions by assets. According to its listing prospectus, it had compound annual profit growth of 26.2 percent from 2010 to 2012. Given the government’s development plan for these regions, a stake in Huishang could be a steady income stream for Vanke.

On top of that, Huishang could serve as a financing platform for Vanke. That gives Vanke a low-cost fundraising channel for its capital-intensive business, National Business Daily reported, citing Huang Lichong, chief executive of China investment bank Synergy Capital.

Then there are the marketing benefits. As a major mortgage loan provider, Huishang can pitch Vanke to its customers.

For now, Vanke is sitting pretty on its property business. It reported 6.1 billion yuan (US$1 billion) in third-quarter profits, up 21.3 percent from the previous year.

But those kinds of scorching numbers can’t keep coming and the industry’s cyclical nature means hot will be followed by cold and vice versa. In fact, experts are forecasting a “definite slowdown” in a few years, according to National Business Daily.

On that note, Vanke may have just made its smartest bet.

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