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China Vanke Co. Battles Record Sales Decline Amid Default Fears


Benjamin Hughes

March 15, 2024 - 04:05 am


China Vanke Co. Sees Dire Sales Drop, Intensifying Default Risks

(Bloomberg) -- Amid a turbulent market, China Vanke Co., a heavyweight in the Chinese real estate sector, encountered its steepest decline in sales over the past six years. This development magnifies the distress of a firm that is currently grappling with the potential of its inaugural default on debt.

Sales Tumble to a Record Low

In a startling revelation, the Shenzhen-headquartered property titan disclosed that its contracted sales for February experienced a 53% nosedive compared to the figures from the previous year, amounting to only 14 billion yuan ($1.9 billion). This substantial contraction marks the firm's most pronounced monthly downturn since records tracing back to 2018, as compiled by Bloomberg. Adding to the bleak picture, the volume of residentials sold by Vanke in February diminished by 28%, a stark contrast to January’s performance.

Escalating Financial Strain

This dramatic erosion in sales is poised to further tighten the liquidity crisis plaguing China's second-largest property developer by sales volume. Vanke is actively negotiating with its primary lenders on a debt restructure proposal that aims to avert the occurrence of a bond default in the public markets.

Market Sentiment Slumps

The increasingly precarious situation is reflected in the trading of Vanke's long-dated US dollar-denominated bonds, which have tumbled below the 50-cent mark. This descent below par value signals the market's heightened perception of default risk. Reinforcing these fears, Moody’s Ratings demoted Vanke's credit rating into speculative grade earlier this week, appending a caution concerning potential further downgrades.

Despite the overall apprehensive mood, there seems to be a less alarmed view regarding Vanke's short-term debt prospects. Illustrating this sentiment, its $600 million note maturing in June was observed trading at 93.8 cents on the dollar this past Friday, suggesting that immediate default fears may be somewhat overstated.

A Bellwether in Distress

Vanke has long been regarded as an important indicator for the extent of governmental backing for significant developers. When the company confronted a bond price decrease in late 2023, a noteworthy assurance came from a senior figure within Shenzhen’s State-owned Assets Supervision and Administration Commission. The official proclaimed confidence in Vanke and pledged support under “extreme conditions.”

Stock Prices Reflect Uncertainty

As a consequence of the disappointing sales report, Vanke's shares in Hong Kong suffered a 4.55% setback, intensifying the year-to-date shrinkage to 18.56%. Furthermore, there was a 2.68% reduction in the value of its Shenzhen shares.

Investor sentiment has increasingly skewed towards betting against Vanke's stability; short positions in the company’s Hong Kong-traded shares have surged. In fact, they now surpass 14% of the free float, according to data from S&P Global Market Intelligence. This marks Vanke as one of the most heavily shorted stocks across Asia. When considering Chinese property developers, Vanke's short-selling ratio is presently second only to Country Garden Holdings Co., which itself had to contend with a liquidation petition in Hong Kong not long ago.

In view of these troubling financial indicators and market reactions, the picture painted is one of a real estate giant teetering on the precipice of fiscal uncertainty. With substantial payments looming and a continuing slump in property sales, Vanke may find itself in a precarious position that could necessitate State intervention. The pledge of support from a high-ranking official may offer a glimmer of hope for the firm as it navigates the treacherous waters of the debt market. Nevertheless, the developer's immediate future seems contingent on its ability to renegotiate terms with creditors and to foster consumer confidence in a bid to rejuvenate its sales figures.

For further details, refer to the Bloomberg News article, accessible through the image source link provided below: Vanke Company Filings

Analyzing the Cash Crunch

The cash crisis confronting Vanke indicates larger issues within China’s real estate market. Developers across the nation are feeling the repercussions of tightened credit policies, which were intended to curb speculative investment but have also stifled legitimate buyer demand and property sales. Vanke's strategies for navigating this straitened economic landscape include asset divestment and appealing for government and foreign investment. Still, the stark reality is that these measures might not suffice to counteract the effects of a prolonged sales depression.

Moody's Slashes Rating, Echoing Market Fears

The decision by Moody’s Ratings to downgrade Vanke into junk status mirrors a market consensus about escalating risk factors, which include not only dwindling sales but also the overarching debt landscape. Credit rating adjustments such as this play a crucial role in influencin