Vanke Profit Gains on Strong Sales Amid Ownership Fight

(Bloomberg) -- China Vanke Co., the developer at the center of a battle for control, posted a 10 percent increase in first-half profit as a home-market recovery boosted sales, helping offset uncertainties over the company’s future because of the ownership struggle.

Net income at the nation’s largest residential developer climbed to 5.35 billion yuan ($804 million), or 0.48 yuan a share, in the six months ended June 30, from 4.85 billion yuan, or 0.44 yuan a share, a year earlier, the company said in a filing to the Shenzhen stock exchange on Sunday. The profit figure missed an average estimate of 5.65 billion yuan from three analysts compiled by Bloomberg.

Revenue grew 49 percent to 74.8 billion yuan based on Chinese accounting standards. That figure was 70.7 billion yuan using international standards, a second release to the Hong Kong stock exchange said.

The Shenzhen-based company’s earnings have been helped by surging residential property prices and a long-term strategy that focuses on China’s rising middle class in leading regions. That helped shield the company during the first half as it cautioned about the negative fallout from a shareholder fight that has been going on since the end of last year when Baoneng Group emerged as the developer’s biggest shareholder, prompting an outcry from Vanke’s management.

Operations affected

"Vanke management stability remains a concern for us," John Lam, an analyst at Morgan Stanley in Hong Kong, wrote in an Aug. 4 note. "Recent shareholding disputes have started to affect company operations, as suggested by the decline in July contracted sales.”

The company’s management is under “mounting” pressure, as the ownership tussle prompted banks and rating companies to “seriously” review Vanke’s credit risks, while projects and contracts are at risk of termination, President Yu Liang said in a shareholder meeting in June. 

In its statement to the Shenzhen stock exchange Sunday, Vanke said uncertainty over its stake issues has affected operations, with partners in 31 of its projects having asked for changes of terms, suspensions or possible terminations because of the ongoing situation. Challenges may increase in the second half, Vanke said in the statement. 

No consensus

The battle for control has attracted at least three strategic shareholders after Baoneng, a little-known Chinese conglomerate, displaced China Resources Co. as the developer’s biggest stakeholder. Rival builder China Evergrande Group, controlled by billionaire Hui Ka Yan, has been been increasing its stake in Vanke as has closely held conglomerate Anbang Insurance Group Co. Evergrande has amassed a stake of about 6.8 percent, according to an Aug. 15 filing.

To stave off Baoneng’s unwelcome bid, Vanke proposed a $6.9 billion stock sale to Shenzhen Metro Group as part of a restructuring that would make the southern Chinese city’s train operator Vanke’s biggest shareholder. The proposal hasn’t reached consensus, Vanke said in an Aug. 16 filing. Vanke’s restructuring bid faces almost-certain failure in its current form because it is opposed by Baoneng and China Resources, its two biggest shareholders.

The company said Sunday there is “no consensus yet” on the stock sale proposal. “The company is engaged in negotiation, discussion and improvement with relevant parties and hopes to push forward consensus as soon as possible,” the statement said.

Apart from the current proposal, Vanke is still in negotiation with a potential counterparty, with whom it signed a non-legal binding letter of intent for cooperation in December, it said in the Aug. 16 filing without naming the firm.

Gross profit margin, a gauge of profitability, fell 3.49 percentage points to 17.55 percent from 21.04 percent a year earlier for the main property development business, based on Chinese accounting standards. The company cited projects in the cities of Changsha, Hangzhou, Wuxi, Shenyang and Chongqing for the drop.

--With assistance from Moxy Ying To contact Bloomberg News staff for this story: Emma Dong in Shanghai at edong10@bloomberg.net, Rachel Chang in Shanghai at wchang98@bloomberg.net. To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Andreea Papuc, Gregory Turk

With assistance from Rachel Chang, Emma Dong