Insurer Baoneng takes aim at residential developer China Vanke

                                                          
 

The truce is over. Last week a privately held insurance group bought additional shares in one of China’s largest property developers after a six-month hiatus, setting the stage for a final showdown that is ostensibly a simple morality tale about shareholder rights.
Baoneng Group started buying shares and battling the leadership of China Vanke last December. Its first approach provoked an angry reaction from Wang Shi, the residential developer’s founding chairman, who called the group a “barbarian” that would wreck Vanke’s corporate culture.
Now the fight has been rejoined. After a six-month suspension, Vanke’s Shenzhen-listed shares started trading again last Monday. Baoneng dove in and raised its stake from 24 to 25 per cent, touching a regulatory threshold. It will test whether there are limits to the ruling Communist party’s pledge to allow market forces a “decisive” role in the world’s second-largest economy. And Baoneng’s aggressive use of leverage is raising questions about the role the country’s credit bubble may be playing in an unprecedented Chinese corporate showdown.
Hong Hao, head of research at Bocom International, says the battle for Vanke heralds the arrival of investor activism in China. “It also shows how leverage can level the playing field, although with significant risks,” Mr Hong adds. “In this regard it’s similar to the “Barbarians at the Gate” era in the US, when companies with good and stable cash flows were bought with junk bonds.”
Financial conglomerate Baoneng, founded as a property developer by entrepreneur Yao Zhenhua, first emerged as Vanke’s largest shareholder in early December. Its presence raised concerns for a group built by an independent management team that has never had to answer to a controlling shareholder.
“We’ve never seen a hostile takeover like this in China,” says Rupert Hoogewerf at the Hurun Report, which tracks the fortunes of the country’s billionaires. “One of the reasons it’s such a big deal is that you’re talking about one of the highest profile, most respected entrepreneurs in Wang Shi. To try to take him out of a company that has performed well for many years is unprecedented.”
Before Mr Yao’s raid, which sent Vanke’s share price soaring, the group’s largest shareholder had been China Resources, one of country’s biggest state-owned enterprises.
China Resources is controlled by the central government. But when Mr Wang started looking for a white knight, he turned instead to Shenzhen Metro Group, a rail developer owned by the Shenzhen municipal government. So private enterprise, the central government and a prominent local government are now all represented in the unusual takeover battle.
Vanke proposed making Shenzhen Metro its largest shareholder, diluting Baoneng, China Resources and minority shareholders in the process. Not surprisingly, Baoneng and China Resources both expressed their opposition to the deal.
On June 26, however, it emerged that Baoneng had increased the pressure by demanding a shareholder vote to sack Vanke’s board, which it argued overpaid Mr Wang during years in which he took long sabbaticals to study overseas. Mr Wang denied that he had shirked his responsibilities.
“Baoneng has only been a major shareholder for a few months, and now they want to recall the entire board of directors and expel the entire management team. Do they really have the ability to manage this company?” Mr Wang told the official Xinhua news agency in an interview published on Friday.
In taking on Mr Wang and the entire Vanke board, on which China Resources has three seats, Baoneng appears to have underestimated the counter-reaction. With Vanke’s “stability” under threat, wagons began to circle around Mr Wang and his management team.
China Resources said it did not support Baoneng’s demand. Fu Chengyu, head of one of China’s largest state energy companies, praised Vanke as “a rare example of a well-managed and transparent listed company in China” and urged regulators to protect it.
Echoing Mr Fu’s concerns, Standard & Poor’s said the dismissal of Vanke’s board could lead to financial instability and affect the developer’s credit rating.
Then Huang Qifan, mayor of China’s most populous city, entered the fray. Speaking at a government meeting in Chongqing, Mr Huang suggested that Baoneng’s funding sources for its share purchases should be examined. He added that if the private sector was left to its own devices in such situations, the result would be “a pot of mixed-up soup”.
 

Vanke founder Wang Shi reacted angrily to Baoneng's stakebuilding,

calling the group a 'barbarian'

After Mr Huang’s comments appeared in local media, some of the reports were expunged by censors. But his intervention was significant. Mr Huang played a key role in Shanghai’s development in the 1990s and has long been tipped for greater things in Beijing, giving him a national profile that most Chinese mayors lack.
He also appeared to be echoing earlier concerns that Baoneng was relying on costly borrowing to fund its financial investments. Baoneng’s life insurance unit, Foresea, has sold high-yielding wealth management products to drive premium growth.
Founded just four years ago, Foresea quickly scaled the rankings of Chinese life insurers at a time when the industry was already booming. It rose from 53rd by premiums in 2012 to 11th in 2015. Most of its growth has come from the sale of “universal life” products, which combine a death benefit with an investment component that guarantees a payout after a fixed maturity. For many such products, the protection element comprises only a small fraction of their value.
“I’ve been joking recently about how the insurance sector is typically quite boring, but in China it’s one of the most electrifying sectors to watch,” says analyst Mr Hoogewerf.
Foresea’s premiums soared exponentially, from Rmb272m in 2012 to Rmb78bn in 2015. It collected another Rmb56bn through the first five months of this year alone. Sam Radwan at Enhance, a consultancy that advises several Chinese midsized insurers, says 98 per cent of Foresea’s sales are through banks, which typically only market high-yielding products.
“If you truly wanted to sell traditional insurance protection products, you’d have to make a huge investment in building and training an agency force as well as call centres,” says Mr Radwan. “That takes time and a lot of upfront investment — something they have not done.
“Regulators hate these type of companies that are running themselves more like private equity firms,” he adds. “That is why they are under scrutiny.”

In addition to sales of wealth products, Baoneng Group companies, often referred to as the “Baoneng clique”, have funded purchases by borrowing in China’s shadow banking system. In December, Baoneng affiliate Shenzhen Jushenghua was asked by the Shenzhen Stock Exchange to explain how it had funded almost Rmb10bn in Vanke share purchases. The affiliate said sales of asset management plans, which promise fixed returns, accounted for about two-thirds of its investment capital.
Baoneng affiliates have also applied for — or received approval to — issue Rmb28bn in bonds on the Shenzhen stock exchange, according to recent filings. That would provide the group further ammunition. Yet the recent tumble in Vanke’s share price, in line with a broader decline in mainland property stocks, highlights the risk of this investment strategy. Much of Baoneng’s investment in Vanke is underwater.
For his part, Mr Yao has tried to frame his raid on Vanke as in line with government policy promoting investment, citing last year's stock market collapse.
“Our investment in Vanke is both a response to the country's appeal for help during last year's stock disaster as well as the ‘10 national provisions’ calling for insurance funds to meet the needs of the real economy,” he told Xinhua. 
 

Gabriel Wildau in Shanghai and Tom Mitchell and Yuan Yang in Beijing

Additional reporting by Luna Lin and Ma Nan