26 April 2018
Vanke's chairman Wang Shi (L) and its president Yu Liang are facing a revolt from the company's top two shareholders, Photo: HKEJ
Vanke's chairman Wang Shi (L) and its president Yu Liang are facing a revolt from the company's top two shareholders, Photo: HKEJ

Why there’ll be no winners in the Vanke boardroom battle

The battle for control of mainland property developer China Vanke has intensified.

Major shareholder Baoneng Group has sought an extraordinary general meeting to oust Vanke’s founder and chairman Wang Shi, president Yu Liang and other board members.

The move came after state-owned China Resources, Vanke’s second-largest shareholder, vowed to block a deal that will involve issuance of new shares to Shenzhen Metro Group.

The boardroom feud at Vanke may not have any winners in the end.

Wang, however, could be the biggest loser.

The chairman’s plan to bring in Shenzhen Metro as a white knight appears set to fail.

Vanke announced earlier this month that it will acquire a unit of Shenzhen Metro for 45.6 billion yuan (US$6.9 billion) via a new-share issue.

The deal will result in the state-owned subway operator becoming Vanke’s largest shareholder, pushing financial conglomerate Baoneng to the second place.

Baoneng, which has amassed 24.29 percent stake in Vanke, will see its stake get diluted to around 19 percent, while Shenzhen Metro will end up with over 20.6 percent.

Vanke’s move was seen as an attempt to defend itself against a possible hostile takeover attempt by Baoneng. 

But the plan may not succeed as China Resources and Baoneng, which together control 39.6 percent stake, have both vowed to oppose the deal. 

With the top two shareholders teaming up against him and demanding a special meeting, Wang may be forced to leave the company that he founded and worked for over 22 years.

Hu Sheng, an independent director of Vanke, has revealed that China Resources — which owns 15.31 percent of Vanke — will request Wang to step down if it gains control along with Baoneng.

That said, neither China Resources nor Baoneng will emerge as winners even if they manage to take control of Vanke.

Vanke (00002.CN) shares were traded at 24.43 yuan prior to suspension, equivalent to a P/B ratio of 2.7. And the developer’s H-shares closed at HK$15.76 in Hong Kong on Tuesday, representing a P/B multiple of 1.5.

By contrast, mainland property developers only have a P/B ratio of below 0.5 both in mainland and Hong Kong at the moment.

The huge price premium of Vanke is mainly due to its highly-efficient core management team led by Wang and Yu.

If China Resources and Baoneng take control and throw out Wang and Yu, Vanke may lose the price premium it currently commands in the market.

Thus, new bosses will end up with a much less valuable company. 

Meanwhile, Shenzhen Metro will see its plans get thwarted, derailing its attempt to expand its presence all across the country on the back of Vanke.

As for Vanke’s small shareholders, they too will lose if Wang and Yu exit from the real-estate giant and the developer becomes just another state-owned company.

Vanke appears set for a period of turmoil and pain.

If there is one positive thing in the whole Vanke saga, it is the issue of corporate governance.

State-owned and privately-owned firms have decided to take the game to board and shareholder meetings and decide a company’s fate in an open and civilized manner.

All parties have chosen to play the game according to the rules. It shows that they recognize the rules and believe they will be able to defend their interests under a commercial framework.

As outsiders, we’d like to see more feuds taking place under open rules instead of being settled through under-the-table deals.

This article appeared in the Hong Kong Economic Journal on June 29.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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