Bye bye B-shares

Wang Shi: Vanke’s chairman

Vanke, China’s largest homebuilder by revenue, is moving home itself. At the end of December the company announced plans to convert all of its Shenzhen-listed B-shares to H-shares and move onto the Hong Kong Stock Exchange.

The rationale? China’s B-shares are denominated in Hong Kong dollars in Shenzhen and US dollars in Shanghai. But trading of the foreign currency stocks has been thin for years as overseas investors have opted to access Chinese stocks through Hong Kong. The city’s H-share market – Hong Kong dollar-denominated shares of mainland companies – have proven more popular, enjoying much better liquidity as a result.

Analysts say Vanke’s move to convert its Rmb13 billion ($2.1 billion) of Shenzhen-listed B-shares makes sense.

“The liquidity of the B-share market is very poor. It’s very difficult for institutional investors to make sizeable investments,” says Agnes Deng, head of China equities at Baring Asset Management. “Overall regulations [in Hong Kong] are much more standardised. That has given much more comfort to international investors.”

For Vanke, the move could also lead to a better valuation, says 21CN Business Herald. The weak performance of Chinese equity markets in recent years means Vanke has traded at a significant discount to its mainland peers listed in Hong Kong. In late December Vanke’s shares were priced at 7.9 times estimated 2013 earnings and 2 times book value, compared with 11 times and 2.5 times for China Overseas Land & Investment in the comparable period, for instance. Converting Vanke’s B-shares to H-shares could see it close the gap.

But industry observers detect another motive. Back in August Vanke’s president Yu Liang announced plans to expand outside China. Yu told reporters that its move to Hong Kong could help the Shenzhen-based company fund its international expansion.

Last year Vanke took a small step towards offshore expansion when it bought a 74% stake in Hong Kong-listed Winsor Properties for $128 million. The move followed a separate announcement that Vanke is also looking to invest in properties in the US. And it’s not only Vanke that is eyeing investments outside China. In September residential developer Xinyuan took control of a lot near New York’s Brooklyn waterfront for $54.2 million. Similarly, Shanghai Greenland is spending Rmb8 billion on projects in Australia.

The international push makes sense. Analysts say most developers will continue to see their margins squeezed in the near term. Ratings company S&P also has a negative outlook on the sector, citing uncertain prospects for a sales recovery as the government keeps policy restrictions in place, narrowing profit margins narrow.

For developers, “the return on investment going forward is not necessarily going to be the same as in the boom years. They know that the game is changing and they have to change their business model to adapt and to survive,” says Patrick Chovanec, an associate professor at Tsinghua University in Beijing.

Dalian Wanda is probably the most aggressive in venturing abroad. One of China’s largest commercial developers, it announced a new partnership in December with India’s Reliance Group for projects in two Indian cities. Dalian Wanda is also said to be looking at acquisitions of hotel properties in Washington, New York and Los Angeles, says the Economic Observer, as well as residential and mall properties in the US.

In an interview with the BBC, Wang Jianlin, Wanda’s founder, called the search for overseas assets a “necessary step”, saying that he aims to make Wanda into a truly international business group that will last for “a century”. Last year the company grabbed headlines for spending $2.6 billion on AMC Theatres, the US cinema chain.

“Developers are seeking new areas for growth,” says Zhao Zhenyi, a Shanghai-based property analyst at Industrial Securities. “Property investment returns in foreign countries are usually higher than those in China.”

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