(Yicai Global) Aug. 5 -- Realty developer China Evergrande Group [03333.HK] invested over USD 1.37 billion (CNY9.1 billion) to acquire shares in Vanke A [SHE:000002] and become its fourth-largest shareholder. A source close to Evergrande's Chairman, Xu Jiayin, told Yicai this move is purely financial, and made with funds from Evergrande's own capital. He also said Evergrande had planned to acquire 4.9 percent in Vanke, but Vanke's share price shot up when this leaked, so the plan ultimately miscarried. On the issue of whether Evergrande would increase its stake in Vanke, he said, "It'll stay as is for the present."
Vanke's excellent profitability and low share price shield Evergrande from major investment risks. Evergrande bought the shares at an average cost of CNY17.63 per, and has already reaped CNY1.04 billion in paper profit as Vanke's shares closed at CNY19.7 on August 1, after hitting their price limit. Both companies rank among the top-3 realty firms in China, but have distinctive operating styles. A market consensus holds that Evergrande's launch of the deal when Baoneng and Vanke's management was locked in a desperate struggle over ownership hints at a hidden agenda. Xu Jiayin previously made overtures about taking over Vanke's stake from China Resources Group to its Chairman Fu Yuning at a meeting earlier this year. "That's impossible," said the source. "No agreement has been reached between Evergrande and China Resources."
A source close to Yao Zhenhua, controller of Baoneng Group, also denied covert talks. As its fourth-largest shareholder, however, Evergrande has become a significant player within Vanke, making it increasingly difficult for it to tout Shenzhen Metro as its largest shareholder. In addition, most market players believe that Evergrande may arrange larger deals later on -- or even become the "terminator" in the ownership struggle in Vanke -- which would be in line with its business style. The feud has struck a stalemate after intense rivalry over the past year, and a new "aggressor" may step in to end the fight.
At present, their market caps are the biggest differences between Evergrande and Vanke. If Evergrande keeps increasing its shareholding in Vanke on the secondary market, it may leapfrog Vanke to become China's largest realty developer. At market closing on August 4, Evergrande had acquired a total of 516,870,628 of Vanke's shares, through total investment of CNY9.11 billion, thus claiming about 4.68 percent of total company equity, of which Baoneng holds 25.4 percent, China Resources Group 15.24 percent, and Anbang Insurance Group 6.18 percent, with the rest held in descending order by Evergrande Real Estate, Vanke's Ying An Financial Consulting, Deying No. 1 and No. 2 Asset Management Plans, and Liu Yuansheng.
Among the largest realty developers in China, Vanke has a fractured shareholding. The largest shareholder, Baoneng, has increased its stake in Vanke since late 2015, sparking strong opposition from company management. The company proposed acquiring assets in Shenzhen Metro through a share placement to introduce an alpha shareholder trusted by management, but major shareholders dug in their heels. Such uncertainties in the company's development outlook are impacting its share performance.