Recently, Vanke Group has found itself in tumultuous waters, facing a double whammy of falling stock and bond valuesFollowing whispers of a rejected debt extension exceeding 10 billion yuan, the company appears to be struggling with a narrative of financial turbulenceOnce leading the charge in the real estate sector, Vanke's situation prompts questions about whether it can effectively reduce its balance sheet and weather the debt storm.

What exactly is happening at Vanke?

On March 4th, several of Vanke's domestic bonds experienced significant declinesBy the end of the trading day, the '22 Vanke 06 bond plummeted 36.10% to 50.10 yuan, while the '21 Vanke 04 dropped by 19.19%, trading at 65.05 yuan, and the '20 Vanke 08 went down 9.39% to 65.46 yuan—all marking new historical lows for the company

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Compounding the crisis, the yield on Vanke's overseas corporate bonds set to mature on June 7 of this year reached an alarming 40.876%.

The company's challenges extend beyond just bond pricing; its stock has also taken a hitBy the end of trading today, Vanke A shares on the A-share market had declined more than 4.65%, while shares of Vanke Enterprises listed in Hong Kong fell over 7.13%.

Recent market chatter suggests that Yu Liang, chairman of Vanke Group, led discussions in Beijing with related departments about extending non-standard debt through insurance company-backed loans—negotiations that ultimately fell flatThe stakes involved included a substantial investment of 10 billion yuan from Xinhua Asset Management Co., Ltd.

Even though Xinhua Asset quickly dismissed the rumors, concerns about Vanke's liquidity have been fueled by its repeated asset divestitures that began last year.

In the fall of 2018, Vanke—then an industry leader—first voiced the need to “survive”, sending shockwaves through the real estate community

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As the housing market cooled significantly, Vanke’s proactive measures to safeguard its future need examination in light of its current predicament.

Emergency Denial From Xinhua Asset

On March 3rd, Xinhua Asset Management Co., Ltdpublicly refuted claims regarding misleading information related to its business with VankeAs a leading enterprise in China's real estate sector, Vanke has maintained regular business cooperation with XinhuaThe asset management firm expressed unwavering confidence in China's economic prospects, affirming its commitment to supporting the healthy development of the nation's real estate market.

According to publicly available data, Xinhua Insurance carries an investment asset total of 12.6 trillion yuan, with Xinhua Asset Management overseeing an entrusted third-party asset scale of approximately 624 billion yuan.

Despite Xinhua Asset's clarifications, Vanke has not publicly addressed the ongoing rumors amid sharp declines in its stock and bond prices.

While Xinhua Asset labels these reports as false, the ties between Xinhua and Vanke are undeniable

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Looking at Vanke's debt relationships, as of the end of 2022, Xinhua Asset held a total of seven loans from Vanke, amassing a substantial sum of 9.782 billion yuanThe earliest of these loans is set to mature on December 25, 2024.

Xinhua Insurance's half-year report for 2023 indicated the company’s involvement in three distinct debt plans with Vanke, representing a total of roughly 5.203 billion yuan.

Moreover, outside of loan obligations, Xinhua Insurance’s dividend products rank among Vanke’s top ten shareholdersAs of late September 2023, Xinhua Insurance held 120 million shares of Vanke A stock, accounting for 1.01% of its total equity, making it the tenth largest shareholder.

Interestingly, since the latter half of 2022, Xinhua Insurance has been gradually reducing its stake in Vanke, especially noted in the third quarter of 2023, where it reportedly offloaded 43.52 million shares.

Personnel-wise, the former chairman and executive director of Xinhua Insurance, Kang Dian, now serves as an independent director at Vanke.

It's worth noting that in addition to Xinhua Asset and Xinhua Insurance, Vanke secured approximately 4.6 billion yuan in loans from Taikang Life’s subsidiary, Taikang Asset, and signed agreements with Huatai Insurance to potentially raise up to 4 billion yuan via a debt investment plan.

The Background of Asset Divestitures

Lately, Vanke has frequently sold quality assets.

In February 2024, Vanke sold the remaining 50% interest in its Qibao Vanke Plaza in Shanghai to the Hong Kong Link REIT for 2.384 billion yuan, reflecting a whopping 26.3% discount, with the price dropping roughly 18.6% compared to three years prior

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Post-acquisition, the latter will fully own the project, with Vanke completely exiting the investment.

Undoubtedly, Shanghai's Qibao Vanke Plaza has been a significant revenue generator for the company, maintaining an occupancy rate above 93% and ranking first among all Vanke projects; yet it was ultimately sold at a fire sale price.

Publicly available data shows that from 2020 to 2022, Qibao Vanke Plaza generated a remarkable 1.218 billion yuan in operating revenue, consistently ranking as Vanke's top commercial projectIn the first half of 2023, the plaza generated an impressive 213 million yuan in revenue, again topping the charts within the group.

Just a week after selling the Qibao Plaza, rumors surfaced that Vanke was planning to divest a portion of its equity in its long-term rental apartment business, "Boyu."

Currently, Boyu operates in 32 cities nationwide, managing 236,000 apartments with around 180,000 of them already operational—positioning Boyu as a leader in both scale and operational efficiency among concentrated apartments across the nation

Vanke's chairman, Yu Liang, previously revealed that the company incurred losses amounting to 9 billion yuan over five years while refining the Boyu formula.

However, it was disclosed that as of June 2023, Boyu has recorded positive monthly net profits consistently, with September marking corrective profitability and expectations for overall profit by 2024. Yet, during this wave of success, Vanke seems inclined to disassociate from its substantial investment.

Furthermore, at the end of last year, Vanke also offloaded portions of its hotel assets at a discount.

On December 8, 2023, the receiving party, Banyan Tree Holdings, announced an acquisition involving the purchase of Vanke's stake in three subsidiaries, including Banyan Tree Service (China) for 480 million yuan, a significant reduction from the initial expenditure exceeding 500 million yuan.

The ongoing asset sell-off starkly contrasts Vanke's inventory challenges, with sales figures lagging behind projections.

Analyzing Vanke's operational data reveals that in 2022, its contract sales markedly decreased by 33.6%. For 2023, the total sales reached 376.12 billion yuan, reflecting a 9.8% decline year-on-year, while sales in January 2024 dipped roughly 32% with reported earnings of 19.45 billion yuan.

In a bid to “reduce inventory,” Vanke has expedited its asset liquidations

By the end of September last year, Vanke held stock worth 814.7 billion yuan, significantly lower than in 2022 or 2021. According to statistics from the China Index Academy, Vanke sold a total of 33.4 billion yuan in the first two months of 2024. Compared to Poly Group, the industry leader, Vanke's average selling price fell 6.4%, with a quarter-on-quarter decline of 6.2%—a stark drop.

However, this pricing strategy carries its own set of risks; in 2021 alone, Vanke's net profit plummeted by nearly 50%. Though the company managed to maintain a similar level in 2022, for the first three quarters of 2023, Vanke reported a net profit attributable to shareholders of 13.62 billion yuan, reflecting a year-on-year drop exceeding 20%.

To contend with the ongoing sales slump, Vanke has initiated a sweeping "balance sheet reducing" strategy since 2022, concurrently addressing both assets and liabilities.

A clear tell of this approach is the slowing down of land acquisitions, showcasing reduced cash consumption

According to CRIC's land acquisition rankings, Vanke did not make the top ten in land purchases for 2024, grossing only 4.89 billion yuan and ranking 23rd in the first two months.

In January of this year, Vanke acquired three new land projects located in Yinchuan, Kunming, and Guiyang; data from brokerage estimates indicated that Vanke’s land investment intensity was only 9%, with an average acquisition price of around 5,080 yuan per square meter.

Concurrently, Vanke's debt structure has also shifted significantlySpecifically, interest-bearing debts due within one year decreased to 47.49 billion yuan, down from 63.92 billion yuan at the end of last year, a reduction of nearly 16.5 billion yuanMeanwhile, long-term loans have risen by 35 billion yuan in the same period.

In terms of new financing, on March 1, 2024, Vanke announced plans to issue REITs to raise 1.159 billion yuan, with the underlying assets originating from three of its logistics storage parks.

Trouble for Vanke

Since the beginning of 2024, both the sale and funding aspects of the real estate sector have shown sluggish recoveries, and Vanke remains a focal point, drawing attention to the practical outcomes of projects from key real estate firms.

On the sales front, major cities such as Beijing, Shanghai, Guangzhou, and Shenzhen have announced new policies relaxing housing purchase restrictions

On the financing side, the People’s Bank of China convened a meeting requiring the establishment of a coordinated mechanism for real estate financing to accelerate financing's implementation by March 15.

Latest statistics from the Ministry of Housing and Urban-Rural Development indicate that as of February 28, 2024, a total of 276 cities across 31 provinces have set up real estate financing coordination mechanisms, forwarding approximately 6,000 housing projects that qualify for financial backing, with commercial banks approving loans beyond 200 billion yuan after a selection process.

However, despite comprehensive measures on sales and financing, Vanke continues to experience substantial financial pressure.

On one hand, Vanke's operating cash flow has been diminishing significantly without signs of sales recovery

In 2021, the net cash flow from operating activities saw a 92% decline to merely 4 billion yuanIn 2022, it fell further to 2.75 billion yuan, dropping to just 235 million yuan in the first three quarters of 2023.

On the other hand, Vanke's debt burden remains severeBy the end of September 2023, Vanke held cash and cash equivalents amounting to 103.68 billion yuan, a decrease compared to mid-2023, providing a coverage ratio of 2.2 for short-term debtsWhile this appears considerable, the actual size of the domestic bonds maturing in the next 12 months is already as high as 24.08 billion yuan.

It is important to highlight that due to government regulations mandating the dedicated use of pre-sale funds by real estate enterprises, companies are unable to utilize any funds from pre-sale accounts until they meet required conditions

This has created a situation where firms appear cash-rich on their balance sheets but are unable to tap into that liquidity.

On November 6 of last year, at a conference addressing its third-quarter performance, Vanke addressed recent fluctuations in bond pricing, with participation from over 150 major financial institutions and funding sources domestically and abroadDuring this meeting, representatives from state-owned assets spoke, asserting that Vanke was not navigating this storm aloneShenjie, Chairman of Shenzhen Metro, even stated that the divestiture rumors were unfounded and vowed to assist Vanke in freeing up billions in assets while looking to invest in its bonds strategically.

At that time, Vanke also revealed that after excluding regulated advance payment funds, it had approximately 60 billion yuan in cash

“It’s always the coldest before dawn, but we must remain hopeful about the future,” stated Yu Liang, Vanke’s chairman.

A month later, Vanke's name frequently appeared on guest lists for meetings led by leading banks such as Agricultural Bank of China, China Construction Bank, Bank of Communications, Industrial and Commercial Bank of China, Bank of China, and Postal Savings Bank, aimed at engaging private real estate players in discussions of support.

Currently, no significant defaults have been reported, yet 13 private-listed real estate companies, including Vanke, Longfor Group, Greentown, Jindi Group, and several others remain on alert.

As a leading player in real estate, stakeholders are keenly watching Vanke's ability to navigate this debt dilemma.