In the recent days, Vanke Group has found itself amidst tumultuous market conditions, suffering from substantial declines in both its stock and bond valuesThe root of this financial strain could potentially be attributed to rumors regarding the rejection of a 10 billion yuan debt rollover proposal, casting a shadow over the company's liquidity and future viabilityThis puts into question whether Vanke, a prominent player in the real estate sector, can navigate through this rough patch without succumbing to the pressures of a challenging market.

On March 4, multiple domestic bonds issued by Vanke saw drastic declinesThe bond series “22 Vanke 06” plummeted by 36.10% to 50.10 yuan, while “21 Vanke 04” fell by 19.19% to 65.05 yuan, and “20 Vanke 08” dropped by 9.39% to 65.46 yuan — all hitting historical lows

In a more alarming trend, the company’s overseas bond, which matures on June 7 this year, now has an astronomical yield of 40.876%.

The stock market response has been equally grim, with Vanke A shares on the Shanghai Stock Exchange witnessing a drop of over 4.65%, while those on the Hong Kong Stock Exchange depreciated by more than 7.13%. This compound decline raises serious questions about investor confidence in the company and its ability to manage its financial obligations.

Recent market whispers suggest that Vanke's chairman, Yu Liang, led discussions with relevant regulatory bodies in Shenzhen concerning the extension of non-standard debt involving loans primarily from insurance firmsThe proposal, which included 10 billion yuan from Xinhua Asset Management Co., was ultimately rejected, deepening worries among investors.

In response to the rumors, Xinhua Asset quickly issued a statement dismissing the reports, reiterating their strong business collaboration with Vanke and expressing confidence in the Chinese economic landscape

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They emphasized their commitment to steering the real estate sector toward a healthier trajectory, underscoring the interconnected nature of Vanke and Xinhua Asset's financial dealings.

Despite the quick rebuttal from Xinhua Asset, the fact that Vanke has been aggressively selling off quality assets since last year has only intensified market concerns regarding its liquidity positionStarting in the fall of 2018, Vanke pioneered the narrative of “survival first” amidst a downturn in the real estate sectorNow, analysts and investors are left to ponder the current state of a company once hailed as an industry leader.

On March 3, Xinhua Asset publicly denounced the circulating rumors of its financial relationship with VankeThey declared Vanke as a leading enterprise in China's real estate industry, maintaining a stable partnership with the asset management company

Xinhua's public assets amount to approximately 12.6 trillion yuan, with 624 billion yuan under Xinhua Asset's management, strengthening the perception that these two companies share significant financial ties.

As reported, Xinhua Asset had multiple loans totaling around 9.78 billion yuan, with the first loan repayment due at the end of December 2024. Additionally, according to the 2023 semi-annual report released by Xinhua’s parent company, the total amount involved in the debt plan with Vanke was approximately 5.2 billion yuanIntriguingly, despite Xinhua Insurance being one of Vanke’s top ten shareholders, it has been steadily reducing its stake since the second half of 2022.

Further complicating the situation, Vanke has recently resorted to selling prime assets rapidly to raise cash

The company agreed to offload its remaining 50% stake in the Vanke Plaza in Shanghai’s Qibao district for 2.384 billion yuan, a sharp 26.3% discount compared to previous transactions, indicating a desperate attempt to bolster liquidity.

The Qibao Vanke Plaza has been described as a “cash cow” for the company, boasting an impressive occupancy rate of over 93%. However, selling this asset at such discounted rates raises questions about the long-term strategy, especially when the plaza yielded approximately 1.218 billion yuan in revenue from 2020 to 2022.

To add to Vanke's woes, just a week after the Qibao Plaza sale, news surfaced that the company was contemplating offloading a portion of its long-term rental apartment business, “Boyu.” Currently, Boyu operates in 32 cities with around 236,000 housing units, demonstrating the company's substantial investment and development in the sector

However, Vanke faces scrutiny for wanting to exit this profitable business around the time it has begun to see a turnaround.

Revamping assets has been a double-edged sword for the company, leading to a critical assessment of its overall sales performance and revenue figuresIn 2022, Vanke's contracted sales value dropped by 33.6% year-on-year, and the trend continued into 2023, with a reported decrease of 9.8%. An alarming decline of 32% was noted in sales value for January 2024 compared to the previous year, highlighting the challenges in the housing market.

Amid ongoing efforts to stabilize finances, Vanke has aggressively been reducing its inventory and expendituresBy September 2022, the company’s inventory balance stood at 814.7 billion yuan, reflecting a downward trend

Industry analyses revealed that Vanke's pricing strategies were aggressive, signaling a willingness to engage in riskier discounts to entice buyers while leading to substantial margin pressure.

However, this strategy has backfired dramatically, as evidenced by a nearly 50% drop in Vanke’s net profit for 2021. Despite stabilizing to some extent in 2022, a further decline was observed in 2023, with the company reporting a net profit of just 13.62 billion yuan for the first three quarters — more than 20% lower than the same period the previous year.

To cope with subdued sales, Vanke's strategy since 2022 has involved systematic asset reduction (known as “running down the inventory”), with tangible results on both assets and liabilities

This shift has resulted in reduced land acquisitions, with Vanke not ranking among the top ten land acquirers in 2024.

The company’s debt structure has experienced notable alterations as well, with almost 48 billion yuan in payable debt due within a year, corresponding to a decrease of approximately 16.5 billion yuan since last yearConversely, long-term loans increased by around 35 billion yuan during the same timeframe, reflecting a significant strategic shift to defer short-term debts.

Presently, as Vanke grapples with these diverse financial challenges, the real estate market recovery remains sluggish, leading to cautious optimism as stakeholders anticipate tangible structural improvements in housing policies and market financingMunicipalities like Beijing and Shanghai have relaxed housing price limitations and policies to alleviate the pressure on buyers.

As of February 28, statistics show that 31 provinces and municipalities have established financing coordination mechanisms supporting nearly 6,000 real estate projects, with financial institutions approving loans exceeding 200 billion yuan.

Despite these measures, Vanke is still under substantial financial strain

Its operational cash flow saw a drastic drop in 2021 and 2022, exacerbated by a worrying decline reported in early 2023, further complicating the company’s liquidity predicament.

The current cash-on-hand situation is indeed a red flag; while Vanke claims to have around 130.68 billion yuan available, the company's short-term bonds alone amount to approximately 24.08 billion yuan due within the next year, raising concerns about the effective management of available cash resources.

Additionally, strict regulatory policies instituted since late 2021 have restricted how property firms can utilize advances from pre-sale funds, further constraining access to liquidity and limiting firms like Vanke from leveraging their cash positions fully.

Back in November 2023, during a quarterly earnings call, Vanke's management acknowledged the volatility in bond pricing and indicated that support from state-owned enterprises was on hand, underscoring the interconnected nature of its financial ecosystem

The CEO's comments on the company's resilience also aimed to reassure stakeholders about the transition period, encapsulating Vanke's belief in overcoming difficult phases.

As Vanke seeks to stabilize its footing, the continuing discussions with major banks signal a potential pathway to reform and recovery, albeit under immense pressureWhether this real estate giant can successfully ride out the current debt tumult largely rests on market dynamics, investor sentiment, and the efficacy of policy adaptations in a rapidly evolving economic landscape.

The market watches keenly as the fate of Vanke, a flagship of China's real estate sector, unfolds under this prolonged crisis, with many hoping for a decisive turnaround in fortunes amidst signs of a slowly recuperating market.