Date
27 May 2017
China Vanke, China's largest real estate company, has a market cap of just 180 billion yuan, making it an easy target of hostile takeovers. By comparison, Sun Hung Kai Properties is worth HK$300 billion. Photo: Bloomberg
China Vanke, China's largest real estate company, has a market cap of just 180 billion yuan, making it an easy target of hostile takeovers. By comparison, Sun Hung Kai Properties is worth HK$300 billion. Photo: Bloomberg

Why China’s property sector will remain weak

Who is the largest shareholder of China Vanke Co. Ltd (02202.HK)?

Hint: It’s not founder and chairman Wang Shi. He holds less than 0.1 percent of the company.

China Resources Group has been the largest shareholder of the state-owned firm for the past 15 years with a 15 percent stake.

Previously, it was Foresea Life Insurance and related parties which held a combined 15.04 percent on Aug. 24.

Soon after, however, China Resources Group increased its holding to 15.29 percent for nearly 500 million yuan (US$78.45 million).

Like many large international enterprises, China Vanke doesn’t have a dominant shareholder.

Also, its market cap is about 180 billion yuan, making it an easy target of hostile takeovers.

It seems to be the case now for China’s biggest real estate firm.

Has Vanke — or the mainland’s property sector for that matter — hit bottom?

And more to the point, is this a good time to buy?

My answer is wait and see.

Li Ka-shing, Asia’s richest man, has been selling assets in mainland China in recent years.

Meanwhile, Zhang Xin, chief executive of SOHO China (00410.HK), told the media in a recent interview that she would rather hold cash than launch new projects in the mainland or overseas.

With the mainland rolling back its investment-driven economic model begun in 2013, sectors that used to benefit from it will feel the squeeze.

These include property, gaming and retail.

The shift of growth engine will take years to complete which gives these sectors enough time to adjust.

In August, the commerce ministry loosened restrictions on foreign capital, allowing global players to invest in China’s property market.

The measures also included lifting purchase limits on new homes and easier mortgage policies.

For a long time, investors have favored the word “open”.

There’s no doubt “openness” enabled overseas firms to enjoy cheap labor and land costs in the mainland.

In the past year, regulators have been trying to open up the property and stock markets, as well as relaxing foreign exchange policy.

The key is timing — the valuation of A shares, the renminbi exchange rate and home prices are at, or near, historical highs as happened in the 1980s.

Doesn’t it feel a bit like the time initial public offerings or major shareholders were selling shares at peak prices?

But a good project with a bad price is still a disastrous investment.

Of course, China Vanke is a good company, or it will not be attractive to investors.

I have no doubt about its long-term value but the question is why is China’s biggest real estate company worth only 180 billion yuan?

For perspective, the market cap of Sun Hung Kai Properties (00016.HK), Hong Kong’s biggest property developer, is nearly HK$300 billion.

The market-to-book value of China Vanke is 1.67 – not cheep, or expensive.

We will have to wait and see whether Vanke’s rise will lift the valuation of the mainland property market or whether the stock will come crashing back to earth.

But I believe long-term investors of China Vanke will get their payback.

This article appeared in the Hong Kong Economic Journal on Sept. 25.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/RA

Columnist at the Hong Kong Economic Journal

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