Coming home

Exiting Hong Kong for Shanghai?

Isn’t location, location, location the mantra for the best property investors? Try telling that to New World China, which went public in Hong Kong in 1999 having amassed the biggest land bank in mainland China.

The cash-rich developer looked like it was about to become a formidable player in China’s emerging residential market. However, the problem was that most Hong Kong investors didn’t understand China’s ever-changing housing policies, and thus they failed to comprehend the full value of New World China’s stock too.

The company’s shares traded below their offering price for years, until it was finally taken private by its parent firm at the start of this year (see WiC309).

While New World China took 15 years to go private, it took just 15 months for Dalian Wanda to reach the same conclusion.

Having floated its commercial property unit, Wanda Commercial, in late 2014, the property conglomerate said earlier this month that it planned to part ways with Hong Kong’s stock exchange in a general offer valued at no less then HK$31 billion ($3.9 billion).

Dalian Wanda’s boss Wang Jianlin had high hopes for Wanda Commercial in Hong Kong. During its roadshow the company announced itself as the biggest commercial landlord in China and predicted a market value reaching as high as HK$300 billion.

But that dizzying level was never reached. Instead Wanda executives were forced to cut the IPO’s size by a third after lacklustre interest. Eventually $3.7 billion was raised but Wanda’s shares immediately dipped below their HK$48 offering price on its trading debut. They recovered to a high of HK$77 in June last year but they have since dropped more than 60%.

At the beginning of March this year they traded at HK$32, which meant that Wanda’s IPO investors – if they had stayed put – were staring at a hefty 33% loss. At this price the company was worth HK$145 billion, less than half that Wang Jianlin had first hoped, and it was being valued with a 25% discount to its net asset value, which stood at HK$185 billion as of December last year.

In the past, mainland companies were lured into Hong Kong due to cheaper financing costs, especially the chance to issue bonds in the international market. However, many of China’s listed companies are now allowed to issue bonds onshore at rates that are competitive to the offshore market, and without the same foreign exchange risk.

Price, and ‘face’, are also at stake for Wang, however, who is often identified as China’s richest man. “Both emotionally and rationally, probably Wang can’t accept his property crown jewel is getting such a paltry valuation in Hong Kong,” the magazine China Entrepreneur suggests.

Wang is readying to take his property unit private at HK$48 a share. If successful, the delisting will allow his IPO investors to recoup their investment (news of the plan sent Wanda Commercial’s shares up by a fifth).

But why has China’s biggest commercial landlord failed to excite investors? Part of the story is poor timing, with Wanda making its market debut (see WiC256) just as the mainland property market slowed sharply.

And although the Chinese consumer story is an attractive investment thesis, there are lingering concerns that much of the spending will be channelled through the internet (via e-commerce players like Alibaba’s Taobao) rather than Wanda’s traditional shopping malls.

Wanda boss Wang refutes this view (see WiC182), but as Time Weekly has noted, a recurring question from analysts and journalists in Hong Kong is whether Wanda Commercial is operating in a “sunset business”.

By the end of 2015 Wanda Commercial owned 133 shopping centres across 89 Chinese cities with a total gross floor area of 22 million square metres. Yet its revenue mix points to a different core business. Last year it derived more than 80% of its Rmb124 billion ($19 billion) in revenue from property sales. Rental income contributed less than Rmb15 billion. “So Wanda Commercial is not actually a commercial landlord but a property developer. Some investors could be getting confused by its positioning and business model,” an op-ed in the Hong Kong Economic Journal claimed.

Real estate developers have been struggling for respectable valuations in Hong Kong in general. Both Wanda Commercial and Guangzhou Evergrande trade at less than six times past earnings, while developers in China’s A-share market typically command price-to-earnings (PE) ratios of more than 20 times. This valuation gap is likely the biggest motivator for Wanda’s delisting plan. If the company relists itself in Shanghai or Shenzhen’s A-share market at a higher multiple, Time Weekly says the valuation could reach Rmb500 billion.

The Economic Observer agrees, seeing a trend for more Chinese firms to quit Hong Kong and return home. “The wealth creation effect in the A-share market may possibly lift the curtain on the return of Hong Kong-listed Chinese firms, just like the homecomings of Chinese tech firms listed in the US,” it suggests.

Indeed, Evergrande appears to have moved a step ahead of Wanda already. Langfang Development, a Shanghai-listed developer, said Thursday Evergrande had acquired a 5% stake in the company for Rmb291 million. News portal Guandian also reported that Evergrande is planning to take over a Shenzhen-listed property firm. The moves would keep its IPO options open, including a backdoor listing either in Shanghai or Shenzhen.

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