Viewpoint Real Estate Network Two days ago, on November 5th, Vanke finally decided to spin off its Wanwuyun for listing.
As a property giant with semi-annual revenue second only to Country Garden Services, the listing of Wanwuyun is undoubtedly one of the most important news in Hong Kong’s capital market in 2021.
With regard to the listing of Wanwuyun, Vanke’s management in the past has always been “half with the pipa”. The most recent public statement was the annual shareholder meeting at the end of June this year. Yu Liang once again consulted with investors and said that he would consider making listing arrangements at an “appropriate time” in the future, but there is no listing plan yet.
Everyone in the cloud, including CEO Zhu Baoquan, conveys the belief that “the time is right” to the outside world. However, from the perspective of capital market valuation, the current property management industry is not the most sought after industry, and the industry’s average valuation level has long been lower than in the past two years, and it is difficult for individuals to resist changes in the situation.
For example, Country Garden’s current market value has also dropped by 35% from the highest level.
The pressure released within the enterprise may be one of the signals of accelerated spin-off. Under heavy control, the real estate industry has entered the “winter” in Yu Liang’s mouth. Vanke’s cash and cash equivalent balance fell to 138.666 billion yuan at the end of the third quarter of this year, the lowest level in two years.
The parent company encountered common problems in the real estate industry, which also restricted the pace of expansion of Wanwuyun. In the case of non-listing, the operation and expansion of Wanwuyun mainly rely on operating profit or the support of the parent company. Even if the company gradually reduced the capital burden of expansion through platform output methods such as “Rui Alliance”, the debt ratio in the first half of the year was about 62.76%, which is a high level for property companies.
Therefore, the spin-off of Wanwuyun to improve the financial structure, improve capital operation capabilities and anti-risk capabilities appears to be of more practical significance.
According to news in early April, the property IPO prepared by Vanke may raise US$2 billion, which will be the highest record of fundraising in the property industry and equivalent to about 1.8 times the net assets of Wanwuyun in the first half of the year.
A long-term development case for Wanwuyun may be: Since Country Garden Services went public in June 2018, total assets have increased by nearly 14 times, net assets have increased by more than 20 times, cash in hand has increased by more than 7 times, and debt ratio has also increased from close to 60%. Reduced to 40.88%.
Vanke cash flow pressure
The real estate industry is affected by the “three red lines” and the “two red lines” of bank loans, as well as the supervision of pre-sale funds, and is generally in a difficult situation of tight liquidity. Cash flow is so important that certain real estate companies have begun to emphasize the abundance of cash in hand and bank deposits when they publicize.
Abundant cash can provide sufficient space for accurate capital allocation judgments. Vanke, including Vanke, insists on holding a considerable amount of cash. However, data shows that as of the end of the third quarter of 2021, Vanke’s cash and cash equivalent balance was 138.666 billion yuan, a decrease of 48.32 billion yuan from the end of June and a year-on-year decrease of 17%. This is also the lowest record of cash in hand since the fourth quarter of 2019.
Data source: corporate announcements, opinion index collation
Specifically, in the third quarter, Vanke’s net cash flow from operating activities was -55.619 billion yuan, a year-on-year decrease of 151.62%, mainly due to increased operating expenses; of which, operating activities cash outflow of 124 billion yuan, only purchasing goods and receiving labor services The cash paid accounted for 104.115 billion yuan.
In terms of real estate development business, in the third quarter, Vanke’s contracted sales area was 7.547 million square meters, and the contracted sales amount was 124.68 billion yuan, down 36.5% and 27.6% year-on-year; 37 new development projects were added with a total construction area of 7.357 million square meters. With an area of 5.324 million square meters, the corresponding equity land price was 37.331 billion yuan, a year-on-year decrease of 20%, which was less than sales.
At the same time, from the observation of fund-raising activities, Vanke has maintained a negative net cash flow from fund-raising activities in the past two years. The data in the first three quarters of this year still reached -20.632 billion yuan, showing that activities such as payment and debt repayment are still trending. In contrast, bond financing is still tight as a whole, and real estate companies, including central state-owned enterprises, are strictly restricted from issuing new bonds.
Although Vanke still has ample cash flow, it is still inevitably affected by the situation. Combining this context, it is not difficult to understand Vanke’s current move to spin off property companies for listing. Generally speaking, equity financing through high-quality assets can increase the amount of assets without bringing pressure on liabilities.
According to the statistics of the new media of View Real Estate, Vanke Property (the predecessor of Wanwuyun) has experienced a rapid growth stage since its full marketization in 2015. In 2020, Vanke’s property segment revenue will reach 18.2 billion yuan, with a compound annual growth rate of about 34%; the profit margin has basically maintained around 10%. In the first half of this year, the property segment revenue reached 10.383 billion yuan, with a profit margin of 10.05%.
Data source: corporate announcements, opinion index collation
In horizontal comparison, Country Garden Services achieved revenue of 11.56 billion yuan in the first half of the year, gross profit of 3.86 billion yuan, and net profit attributable to parent company of 2.113 billion yuan. The profitability is slightly better than Wanwuyun.
As of the first half of the year, Wanwuyun’s asset-liability ratio was approximately 62.76%, a 4.15 point decrease from the end of last year, and a significant improvement from the end of 2014 (89.51%). According to the statistics of the new media of View Real Estate, debt ratios of more than 60% are common in the ranks of non-listed companies. Sample companies including Country Garden Services, Poly Properties, Greentown Services, Sunac Services, etc. are also in a similar situation before the IPO.
After connecting with different financing channels through listing, most of the above-mentioned sample companies have achieved financial structure improvements, especially in that the debt-to-asset ratio has fallen below 50%. Take Country Garden Services as an example. In 2018, the company’s debt ratio was 57.81%, but it was only 40.88% in the first half of this year.
Potential debt reduction path
For newly listed companies, the primary benefit of docking with the capital market is to raise large-scale funds at one time with the help of IPOs, and this part of the funds is often used to improve financial structure or business expansion. According to incomplete statistics, in the past three years, among the property companies that have gone to Hong Kong for IPOs, including Shimao Services, Jinke Services, and Sunac Services, have raised funds of more than HK$5 billion.
Among them, Sunac Services, which was officially listed in November 2020, has introduced 4 cornerstone investors before the public offering, and subscribed for a total of 370 million US dollars; the final price of the company was 11.6 Hong Kong dollars, and the financing scale after green shoes reached 9.2 billion Hong Kong dollars, a record property The scale of financing of listed companies is the highest on record.
In contrast, Vanke Property (the predecessor of Wanwuyun) rarely disclosed large-scale direct financing actions. In 2016, Vanke Property announced the completion of the introduction of strategic investors Boyu Capital and 58 Group, the latter two subscribed for a total of 30% of the shares. After the capital increase was completed, the registered capital of Vanke Property was changed to 665 million yuan, and the company’s total investment was changed from 1.37 billion yuan to 1.97 billion yuan.
Before the decision to spin off and go public, the registered capital of Wanwuyun has increased to 1.05042 billion yuan, and it has increased by nearly 400 million yuan through capital increase in the past four years.
As far as the spin-off is concerned, Wanwuyun plans to issue no more than 15% of the total share capital after the issuance, and grant the underwriters an over-allotment option of no more than 15% of the above-mentioned issued H shares. Based on the 660602 million shares held by Vanke and the 62.889% equity ratio of Wanwu Cloud, before the over-allotment is considered, Wanwu Cloud can publicly issue a maximum of approximately 185 million H shares.
The surplus is the valuation problem given by the capital market.
In fact, in the past two years, property companies went public in large numbers, and the valuations given by investors were once quite high. In the first half of 2020, companies including Country Garden Service, Greentown Service, CIFI Yongsheng Service, Xinchengyue and other companies have a price-earnings ratio (TTM) of more than 50 times. Among them, Poly Property and Times Neighborhood are more than 80 times.
This trend has been greatly weakened in 2021. Country Garden Service’s share price fell from the highest value of 85.20 Hong Kong dollars to 41.31 Hong Kong dollars during the year, and the company’s current price-to-earnings ratio (TTM) is about 41.33 times. According to wind statistics, the average price-earnings ratio of 51 Hong Kong-listed property companies at the end of the third quarter was 25.04 times, compared to 34 times in the first half of the year.
From the perspective of valuation, Wanwuyun has actually missed the best window period for property listing.
Previously, a senior person from a South China real estate company also expressed his views on the new media of View Real Estate, saying that the trend of property listing will last approximately from 2018 to 2022, so many unlisted companies plan to complete the listing before the end of next year.
However, the capital story that Wanwuyun wants to tell and the specific situation of the benchmarking company are not yet known. The company has said that it will benchmark the shells, which experienced a sharp decline during the year, and the current price-to-earnings ratio (TTM) is still 41.14 times. At the same time, according to a Bloomberg report in April, Vanke split up its property management business or raised US$2 billion, but the news was quickly denied by Wanwuyun.
In addition to IPO fundraising, it is a common practice for listed property companies to obtain funds through refinancing. Taking Country Garden Service as an example, the company successively adopted shares placement and issuance of convertible bonds in January 2019, April, December 2020 and May 2021, and accumulated financing of approximately HK$29.145 billion.
In particular, on May 24 this year, Country Garden Services issued 139 million shares, priced at 75.25 Hong Kong dollars per share, and raised funds of 10.488 billion Hong Kong dollars; at the same time, it issued convertible bonds with a conversion price of 97.83 Hong Kong dollars and raised funds of 5.038 billion Hong Kong dollars. This batch of funds laid the foundation for the company’s successive acquisitions of Blu-ray Jiabao and R&F Properties during the year.
The balance sheet also shows that after several rounds of financing, the current assets of Country Garden’s services have increased significantly, mainly reflected in the increase in cash and cash equivalents; assets have increased as a result, and net assets have increased by more than 20 times since the listing in the past three and a half years. Thanks to this, the debt ratio has dropped from nearly 60% before the listing to 40.88% in the first half of the year.
Relying on the blessings of the capital market, as of the end of June this year, the area under management of Country Garden reached 644 million square meters; of this, 267 million square meters were added in the first half of this year, and 130 million square meters came from Blu-ray Garbo, which relied on fund-raising for mergers and acquisitions. Come.
With reference to the development path of mainstream property companies after listing, Wanwuyun also has the opportunity to maintain expansion while achieving a virtuous circle of financing and operation.
Existing platform expansion path
After nearly six years of market-oriented development, Vanke has maintained rapid expansion. As of the end of 2020, the company has an area of 566 million square meters under management and a debt ratio of 66.91%.
Compared with its counterparts, such as Country Garden Services and Sunac Services, which adopt M&A expansion, Wanwuyun has fewer large-scale M&A cases. In July 2018, Vanke Property purchased 4.9% of the shares of DTZ with an initial public offering price; on December 12 of the following year, Vanke Property and DTZ signed a joint venture company.
The 2020 annual report shows that among the major subsidiaries that Vanke increased through mergers and acquisitions last year, the main ones involved in property management were Beijing DTZ Property Management, DTZ Guangzhou Property Management, Huiyang Jinlida Property Management, and DTZ Property Consulting Shanghai.
Wanwuyun may be more concerned about the platform development model. The company previously expressed its intention to find a house in the standard shell. Zhu Baoquan also said that the company’s changes are similar to shells, including investment in some property companies and this part of the property. The company purchases the technology services of Wanwuyun; Wanwuyun also plans to cover this business under its sub-brand of space services, and use Rui Alliance as the main carrier for external output.
As early as 2013, Vanke Service launched the Rui service system. Since then, the company has gradually created the “Rui Alliance”. Rui Alliance uses unified facilities and equipment, employees, customers, payment systems or standards for member companies, and at the same time shares solutions through the Rui service cooperation model. With this platform, Vanke successfully expanded the scale of Rui Alliance.
Among medium and large property companies, in October 2019, Thang Long Investment Group and Wanwuyun reached a strategic cooperation. The property joint venture established by the two parties joined the Rui Alliance. Wanwuyun said it would actively support its listing; in late September this year, after the reorganization of Thang Long The property platform Wanying Service submitted the prospectus, with a total area of 11.267 million square meters under management.
In September of this year, Wanwuyun announced the acquisition of Sunshine Zhibo, a subsidiary of Sunshine City, through a share swap. Specifically, it obtained 100% equity of Sunshine Zhibo through the issuance of 4.8% shares. In this cooperation, the two parties are not involved in cash transactions, and Wanwuyun obtains a service area of 30.2 million square meters.
Also in September, Byrne Property announced to join the Wanwuyun ecological family, and Wanwuyun’s residential brand coverage area has increased again by 70 million square meters.
The output of the Rui Alliance platform is reminiscent of the platform output of Color Life through Caizhiyun a few years ago. In 2018, Color Life had reached cooperation with 95 companies through platform output guidelines, corresponding to a cooperation area of 569 million square meters, and the company’s contracted management area was only 554 million square meters during the same period. But since then, Color Life has deliberately reduced its expression of the cooperation area.
But in any case, the platform output will become the main weapon of the cloud of all things at this stage and in the future listing stage, which may also be the meaning of its standard shells. According to Zhu Baoquan’s statement at the Vanke Media Communication Conference in late October, in the SPACE segment of Wanwu Cloud, the growth rate of Vanke Property is controlled at 30%, the growth rate of Wanwu Liangxing is 30%-60%, and the growth rate of Wanwu Cloud City is greater than 60%.
To a certain extent, high-speed growth can reduce the damage to the debt structure through the output method of the Rui Alliance platform and the introduction of war investment. The asset-liability ratio of Vanke’s property segment reached 89.51% in 2014, and has now fallen to around 60%.
However, the lack of more financing channels will make Wanwuyun lack the ability to further optimize. From this point of view, listing is indeed an inevitable choice for all things cloud.
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