Vanke does not do Country Garden

"Core Tips"

No one can escape the fate of being examined with a magnifying glass.

Author | Zhan Fangge

Edit | Xing Yun

Recently, the news from the real estate circle has been mixed.

On the 9th, there was news in the market: Vanke plans to use its own funds and overseas loans to repay offshore bonds due in 2024.

Not long ago, Vanke held a communication meeting on the news of the fluctuation of US dollar bonds, and in order to strengthen the confidence of investors, the Shenzhen State-owned Assets Supervision and Administration Commission publicly stood for Vanke, which caused a lot of shock in the real estate industry.

On the 8th, Country Garden was also involved in the center of public opinion. Ping An of China refuted previous reports by Reuters, saying that it had not received any requests from government departments/agencies for it to acquire Country Garden and inherit its debts. Ping An, once the second-largest shareholder, has emptied its stake in Country Garden. Country Garden did not welcome the "white knight" as the market expected, and the stock price also took a roller coaster, falling 9.64% on November 9.

For real estate companies, how far away from risk is only as close to confidence.

"Confidence" is a high-frequency word that has been repeatedly mentioned in the real estate industry recently. Country Garden defaulted on its offshore bonds after holding out for a long time. The feedback from the sales side is not good, the entire industrial chain cannot be opened, and the market is in turmoil. In such an environment, even Vanke, which has smooth financing and no problems with its fundamentals, cannot escape the fate of being examined with a magnifying glass.

How to regain confidence? Yu Liang said at the communication meeting: The recovery of the market requires the combined force of the three groups of forces that "can buy, want to buy, and need to buy." One of the key difficulties is "want to buy", that is, how to restore consumer confidence.

1. There is no problem with the fundamentals

In response to the sharp drop in US dollar bonds, Vanke responded that there is no problem with the company's fundamentals.

In October, Fitch downgraded Vanke's Long-Term Foreign Currency IDR to 'BBB' from 'BBB+' with a 'Stable' outlook, along with Vanke's state-owned Poly Development.

A look at Fitch's rating reports shows that many of them are quite pertinent. For example, they acknowledged that Vanke has good access to onshore and offshore financing, and that the company has secured additional low-cost onshore and offshore borrowings in China's difficult financing environment, including a new CNY6 billion onshore bond issuance in the first half of 2023. Previously, Vanke said that the company had no mature US dollar bonds to repay during the year.

At the same time, Vanke remains one of the lowest financing costs. The real estate companies with similar financing costs are China Shipping, China Resources and Poly, all of which are state-owned enterprises that have developed rapidly in recent years. On the other hand, mixed-ownership real estate companies similar to Vanke, Sino-Ocean and Gemdale, are all in the midst of a storm, not to mention the cost of capital.

Gemdale and Sino-Ocean were respectively reduced by core shareholders after the accident. This has also plummeted the market's confidence in mixed-ownership real estate companies.

The shattering of faith only takes a moment. Now the fate of the "predecessors" has made the already sensitive capital market rumor, and they have to pick up a magnifying glass to examine Vanke.

Will Vanke "take risks"? In a market environment where expectations are uncertain, no one dares to make a conclusion. A person close to Vanke told Leopard Change that at present, Vanke is able to deliver without delay or default in areas with few first- and second-tier cities, and can also repay suppliers monthly.

The more important indicator is the account period, but the length of the account period has different meanings for different real estate companies. For medium-sized SOEs with better credit profiles and fewer financial instruments, longer payment cycles seem to mean tighter cash flows. Some industry insiders told "Leopard Change" that although many state-owned enterprises can still pay suppliers, the account period has been extended.

For Vanke, which is rich in financial instruments, the reduction in the number of days of accounts payable turnover is not a good thing.

Fitch said in the report that Vanke's accounts payable turnover days fell from 338 days in 2021 to 260 days in 2022 as suppliers also scaled back the issuance of supply chain financial asset-backed securities. But at the same time, it said that this impact may weaken after 2023.

2. Shenzhen Railway stood up for the second time

Before the meeting, Vanke's share price had fallen to its lowest point since 2016: closing at 11.22 yuan on November 2. The last time it fell to such a point was back in the period of the Baowan Controversy. At that time, Vanke and Baoneng, the "barbarian at the door", launched an offensive and defensive tug-of-war. On July 20 and July 21, 2016, Vanke's share price fell below 10 yuan per share.

In the past two days, two major events occurred: on July 20, Vanke entered the list of "Fortune 500" for the first time, ranking 356th, and was said to be the only pure real estate company in the "Fortune 500" that year; on July 21, the Shenzhen Securities Regulatory Bureau issued letters of concern to Vanke and Jushenghua respectively, and asked their main persons in charge to go to the CSRC for an interview. The move was seen as a formal intervention of the regulator in the Baowan dispute.

In 2015, Vanke was still the industry leader, and Country Garden, which was later known as the "No. 1 real estate company in the universe", only ranked seventh that year. The battle of "Baowan Dispute" greatly damaged Vanke's vitality, and Evergrande caught up. In 2016, the top spot in the sales of real estate companies was replaced by Evergrande. In the following years, Vanke did not return to the position of TOP1 in sales, and Evergrande and Country Garden ushered in their era.

In 2018, many real estate companies are still holding high and advancing by leaps and bounds, and Vanke officially shouted the slogan of "Survive". At the end of the same year, Vanke's asset-liability ratio and asset-liability ratio after excluding pre-receivables (announced caliber) reached the highest level since its listing, and then began to decline slowly.

Wind data shows that its debt-to-asset ratio has now dropped from 84.59% at the end of 2018 to 75.28% at the end of the third quarter of 2023. According to the announcement, from 2018 to the third quarter of 2023, Vanke's indicator has experienced a process of first falling and then rising, and finally stabilized at about 50%.

At the same time, Vanke's land acquisition has also begun to decrease. According to the annual report, in 2020 and 2021, the total equity land price spent by Vanke on land acquisition was 138.15 billion yuan and 140.15 billion yuan, respectively. However, in 2022, the total equity land price has plummeted to 49.64 billion yuan. The sharp decline in new projects started was even earlier: Vanke's planned new construction area in 2021 was 31.484 million square meters, while the planned new construction area in 2022 has fallen to 19.201 million square meters.

Prior to its recent acquisition of the Vanke Donglu plot in Tongzhou, Beijing, Vanke had not acquired land in Beijing for four years. In fact, first- and second-tier cities have always been Vanke's heavy positions.

In 2017, the entry of Shenzhen Railway ended the dispute between Baowan and Wang Shi. Now, under the strong market pressure, Shenzhen Railway has also given Vanke a considerable degree of support.

Judging from the news that flowed out of the previous communication meeting, the Shenzhen State-owned Assets Supervision and Administration Commission stated that Vanke is an important member of the Shenzhen state-owned assets system. If it encounters an extreme situation, Shenzhen state-owned assets will also actively respond through all market-oriented and legalized means. Help Vanke maintain the bottom line of no business risks.

For example, it will speed up the progress of Vanke's urban development projects through cooperative development, improve the liquidity of Vanke projects through cooperation, actively coordinate state-owned institutions to subscribe for Vanke bonds, and actively coordinate with financial institutions to increase Vanke's financing efforts. Shenzhen State-owned Assets Supervision and Administration Commission also fully affirmed Yu Liang, chairman of Vanke, at the meeting.

Anyone with a discerning eye can see that the main purpose of this communication meeting is actually more like boosting confidence. Since Vanke was trampled on and injured by market sentiment, "confidence is confidence", and Shenzhen SASAC will be Vanke's greatest confidence.

3. Real estate companies that cannot become Vanke

The market continued to decline, and before Vanke, many real estate companies were the targets of short selling US dollar bonds. The vast majority of them are indeed in crisis right now.

The first batch of downgraded real estate companies died of blind expansion and leverage. For example, Kaisa, which first brought the US dollar bond explosion into people's field of vision. Fitch has reported that its leverage ratio was as high as 63% in 2019 and barely fell to 52% at the end of 2020. There is also R&F, whose leverage ratio fell to 55% at the end of 2019 from 58% at the end of 2018. Fitch believes R&F's leverage is likely to remain around 55% between 2020 and 2023.

And those companies that started deleveraging early on, the risk appeared later. For example, the representative of the longest-lasting real estate company - Country Garden. Since the beginning of the "deleveraging" tide in 2018, we have begun to plan deleveraging. In the same year, its net borrowing ratio decreased by 7.3 percentage points. Another example is Vanke, which is still insisting on it today.

Another subjective reason for the explosion comes from the high price of land. In the first half of 2021, the policy of centralized land supply was launched, and if you don't take land at this time, there will be no rice for cooking, and the enthusiasm of real estate companies to take land has been greatly mobilized, and high-priced land plots have also come into being. CRIC reports show that in April and May 2021, 46 and 32 high-priced plots were produced respectively.

According to its statistics, 10% of the "high-priced land" in the sample are located in first-tier cities, while 48% and 42% are in second-tier and fourth-tier cities, respectively. Third- and fourth-tier cities are often considered "low-energy cities" in real estate investment, and the proportion of high-priced land in low-energy cities actually reaches 90%.

There is always a pattern of market downturns, and low-level cities must be the first to be affected, and the impact is broad and deep, and the recovery is slower. The decline in sales eventually led to a decline in house prices, and a vicious circle has been formed, which shows no signs of stopping. Country Garden stepped on this thunder.

In August, Country Garden issued an announcement of large losses, and the management explicitly mentioned in its apology letter that it had "invested too much in third- and fourth-tier cities and lower-tier cities".

Vanke's situation seems to be much better. Fitch reported that in the first half of 2023, Vanke purchased land in only 10 cities, all of which were in first- and second-tier cities or third-tier cities around Shanghai. Even though the land acquisition is reduced, Vanke is committed to maintaining the land bank for 2 to 3 years to support development, so the land reserve is still relatively abundant.

At the communication meeting, Yu Liang said that the reason for the high pressure in the past two years is that the peak of commercial residential construction and delivery has been superimposed on the continuous decline in sales, but from the perspective of industry construction, this superposition process will basically end in the second half of next year.

With the passage of time, more and more real estate companies have fallen into a bottomless swamp. If you have to ask "why", the subjective reason is actually becoming less and less important, and it is replaced by the word that is constantly mentioned in Vanke's communication meetings - "confidence".

Yu Liang said, "Vanke has always had confidence in the market", and also said that "the current difficulty is the problem of 'wanting to buy', which is to restore consumer confidence". These two kinds of faith are one and the other.

According to data from the China Index Research Institute, in the past October, the monthly sales of the top 100 real estate companies fell by 33.5% year-on-year. Earlier, monthly sales fell 24.1% year-on-year in September and 39.2% year-on-year in August.

On November 8, Ping An of China refuted a Reuters report that the company had never received any request from any government department/agency to acquire Country Garden Holdings Limited and inherit its debts. Although Country Garden fell sharply the day after the rumors were refuted, Country Garden ushered in a 12% rise on the day the news was fermented.

Faith builds time, and that's a saying that you can't go wrong anywhere. How to build up the most basic confidence, then water and fertilize it, and wait for it to grow into a towering tree with good wood quality is the real homework. Wind prevention and sand fixation is a later story.