Dalian Wanda Commercial Properties, the Hong Kong-listed commercial developer controlled by Wang Jianlin, halted share trading on Monday as part of a $4 billion plan to first privatize the giant mall builder, and then re-list it on a mainland bourse.
While Wang has made detailed promises to investors in the privatisation scheme –- including a guaranteed minimum return of at least 12 percent on the share buy-back plan – the billionaire has been much less forthcoming about the reasons for the potentially risky financial maneuver.
With mainland listed companies routinely trading at a much higher price to earnings ratio than offshore-listed Chinese firms, Wanda could be using the re-listing scheme to fight back against international skepticism regarding its business performance. With top-three residential developer Evergrande also said to be maneuvering to shift its listing to the mainland, Wanda could be a bellwether for a future migration homeward of Chinese-listed real estate developers, as foreign investors continue to doubt growth prospects for the domestic property industry.
Closing in on a Re-Listing
Before halting trading on Monday, Chinese private equity investors had already oversubscribed Wanda’s plan to invest HK$31 billion ($3.99 billion) to buy back the 14.41 percent of its Hong Kong-listed shares not already owned by mainland concerns, according to a report in Caixin.
According to Wanda’s investment proposal, if the commercial developer is not re-listed on a mainland exchange by August 31st, 2018, then Wanda would repurchase the shares with interest, at an annualised rate of 8-10 percent.
In switching its listing from Hong Kong to a mainland exchange, Wanda projects that it could achieve a price to earnings ratio of 20 times, compared to the 9.3 times that it was achieving in Hong Kong, according to the company’s investment proposal.
Currently, shares listed on the Hong Kong bourse typically achieve price to earnings ratios of around 11 times, and the China Enterprise Index of mainland companies averages only 7.2 times. By contrast, the Shanghai and Shenzhen markets have average price to earnings ratios of 16 and 26 times respectively.
Despite the difference in price to earnings ratios, Wanda’s de-listing came as a surprise to many observers, as it happened just 15 months after the developer achieved Hong Kong’s biggest IPO of 2014, with a $3.7 billion public listing.
Since that December 2014 debut, however, Wanda’s stock slid from its IPO price of HK$48 per share to just HK$31.55 per share, before news of the company’s privatisation plan hit the markets in March.
Sorting Out the Whys of Wanda
While the promise of a higher price to earnings ratio should appeal to Wanda’s commercial motives, the process of re-listing carries risks, particularly as the company has not yet received approval from mainland authorities for a listing Shanghai or Shenzhen. While China reopened the gates to the IPO process in November last year, it suspended all new public offerings for five months of 2015 following an abrupt stock market slide in June.
One of the reasons that Hong Kong became the primary point of listing for mainland companies has been the opaque process for achieving a domestic listing in China, and the tendency by Beijing to restrict new listings whenever stock prices slide.
There is also risk that Wanda’s stock could perform worse on the mainland than it did in Hong Kong. Poly Real Estate, which lists on both exchanges, has a price to earnings ratio of six times in Shanghai, but achieves 23 times its earnings on the Hong Kong bourse.
The cost of re-listing could also end up being more than Wanda originally estimated, with the stock rising to HK$51.30 per share by Monday. In a filing with the Hong Kong stock exchange, Wanda has stated that it would offer not less than HK$48 per share (its IPO price) to buy back its stock. At the HK$48 per share rate, the buyback scheme would cost HK$31.3 billion
However, at the HK$51.30 price, Wanda will need to come up with another HK$2 billion to offer shareholders the current value of their shares.
The developer’s lack of a clear pricing strategy for the buy-back plan earned it criticism from analysts from at least one investment bank. “We believe the whole deal structure does not make sense from a capital market viewpoint, especially as they announce an “intended offer price” and then increase the price further,” JP Morgan analyst Ryan Li said in a note to investors.
Leveraging Wang’s Star Power
While the deal may not make sense to some of the market’s more sophisticated investors, Wanda’s hopes for returns on the mainland could hinge on mom-and-pop stock shoppers who could be wowed by Wang Jianlin’s star status as China’s richest man.
Wang is estimated by Forbes to have a personal fortune of $34.6 billion, and the company has been marketing its boss as a thought leader and strategic thinker. Wang’s penchant for buying up trophy properties in London, Los Angeles and other high profile locations, has also kept both Wanda and its boss in the news, and earlier this year the company debuted a new section on its website dedicated to spotlighting wise quotes from the billionaire property developer.
Part of Wanda’s strategy for transforming itself from a mall builder to a builder of theme parks and ecommerce provider appears to be inflating its corporate profile with the Chinese public, and the company has at times averaged nearly one PR announcement every two days on its website, featuring the debut of new projects as well as a string of public appearances by Wang himself.
Evergrande Could be Following Wanda’s Lead
On Monday, the same day that Wanda halted trading in it shares, Evergrande Real Estate agreed to buy a 52.78 percent stake in Shenzhen-listed real estate developer China Calxon Group for RMB 3.6 billion ($553.8 million), in a move that many have interpreted as aimed at achieving a mainland listing for the giant developer.
In its note to investors, JP Morgan’s Li noted that, “If Evergrande has proved successful in raising money via its new subsidiary in A-shares, there could be an influx of developers buying shells in the A-share,” referring to the mainland listed A-share market.