CHINA VANKE(000002)：SHAREHOLDER REQUEST OF GENERAL AUTHORIZATION FOR SEOS PRESAGES UPBEAT PROSPECTS

　　Core views:
　　China Vanke’s largest shareholder not only firmly supports the Company’s development but also appears happy to facilitate its equity fundraising at the present stage. We believe that with the potentially higher return on equity (ROE) of investment in the real estate market, equity fundraising by companies with strong development capabilities at this stage is very beneficial to both new and existing shareholders. Over the years, China Vanke has proved its strong development capabilities and maintained a hefty strategic foresight. For example, when the market was excited and peers paid high land acquisition prices, China Vanke significantly reduced its proportion of planned GFA in the total land banks and avoided foraying into too many tier-3/4 cities. Instead, China Vanke has maintained a lean headquarters along with robust regional branches.
　　Abstract:
　　Event: China Vanke announced that the Company’s largest shareholder Shenzhen Metro Group requested the shareholders’ meeting to authorize the Board of Directors to fully handle the issuance of no more than 20% shares in A-share and/or H-share markets.
　　Shenzhen SASAC not only firmly supports China Vanke’s development but also demonstrates the confidence of existing shareholders in SEOs at the present stage.
　　Previously, China Vanke signed comprehensive strategic cooperation agreements with six enterprises under the Shenzhen Municipal State-owned Assets Supervision and Administration Commission (Shenzhen SASAC). This has fully demonstrated the long-term support of Shenzhen SASAC for China Vanke. Shenzhen Metro Group’s request for the shareholders’ meeting to authorize the Board of Directors regarding the general authorization for seasoned equity offerings (SEOs) once again demonstrated the support of the largest shareholder for China Vanke’s development. This also showed that the largest shareholder believes issuing shares at present is an act of maximizing the interests of existing shareholders.
　　A-share SEOs will help leading A-share developers optimize their balance sheets and create higher EPS for new & existing shareholders.
　　We reckon that it was no accident China Vanke’s largest shareholder initiated the request for general authorization shortly after A-share SEOs were given a green light. We believe that real estate developers can’t rely on debt financing alone for development, while the absence of equity financing is also a key reason for many real estate developers to suffer credit risks after 2021. Once the balance sheets of leading real estate developers are optimized and the ROE of potential investment in the real estate market starts to trend higher, companies with strong development capabilities may effectively improve their profitability with funds raised, thus creating higher EPS for new and existing shareholders participating in the issuance.
　　Since the real estate market may stabilize in 1H23, China Vanke will embrace a sound development environment.
　　We believe that the record-low average mortgage interest rate and constantly optimized Covid-19 prevention and control measures have laid a solid foundation for stabilizing the fundamentals of real estate demand. Coming into 4Q22, transactions in the secondary housing market have recovered conspicuously. We expect that in 2023, housing sales will show a backloaded pattern throughout the year, and the full-year sales of commodity housing will only decrease by 2% YoY, but China Vanke will likely outperform peers in the industry. Considering the banking system’s active support for the development of real estate developers with high credit ratings, we expect once China Vanke obtains incremental equity financing, its sales will increase significantly, and its profitability may also improve along with a growing market share in 2024.
　　Potential risks:
　　Downward housing prices in some cities; the largest shareholder’s request for general authorization for the Board of Directors failing to cement the timeline and details of future financing plans; SEOs failing to increase the EPS for new and existing shareholders due to a decline in the ROE of potential investment in the real estate market.
　　Optimistic about the rise of the A-share leading developer:
　　We believe that China Vanke has proved its strong development capabilities and maintained a hefty strategic foresight. For example, when the market was excited and peers paid high land acquisition prices, China Vanke significantly reduced its proportion of planned GFA in the total land bank and avoided foraying into too many tier-3/4 cities. Instead, China Vanke maintained a lean headquarters and robust regional branches. In terms of management, China Vanke has always been an industry leader but once lagged behind H-share red-chip listed companies in terms of USD-denominated bond issuance and SEOs. Nowadays, peers’ advantages in USD-denominated bond issuance and SEOs no longer exist, which is a boon for China Vanke. We maintain our 2022E/23E/ 24E EPS forecasts of Rmb2.10/2.26/2.54. Based on the 6x-15x 2022E PE of comparable developers with high credit ratings, such as Poly Developments (600048.SH), China Merchant Shekou (001979.SZ) and CR Land (01109.HK), we apply 12x 2022E PE to derive a target price of Rmb25 for its A-shares and HK$29 for its H-shares and reiterate the “BUY” rating on both.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。