China rental company’s shares have cratered 76% this year

Posted by Jane ava on December 18th, 2020

A more than 76 percent share price drop for its parent company since its initial public offering this year in GUANGZHOU, China. Questions about its financial stability. Clashes between its platform users. Danke, a Chinese residential rental firm, has a business model based on debt that shows signs of strain.

Danke, owned by Phoenix, which is listed in the United States, denied last month that it is bankrupt, even though it faces criticism from the landlords and tenants it represents. In SEC filings posted on its website, Phoenix Tree describes Danke as the "primary focus of our company" and uses the Phoenix Tree and Danke names interchangeably in filings, including its quarterly financial results. 

Established in 2015, Danke leases owners' properties on a long-term basis, refurnishes them, and then rents them out. The business model includes getting more cash back from tenants than Danke charged to rent the flat. Danke promotes itself as a tech company, stating that the "backbone" of its business is data, artificial intelligence and its IT infrastructure. 

But by taking out a loan with one of the company's affiliate banks, the largest being WeBank, which is operated by the Chinese internet giant Tencent, Danke's tenants also pay a year's rent upfront.

Upfront payments allow Danke to plough cash into the company and into renovations. But Danke has yet to make a profit, and since the coronavirus outbreak, its financials have taken another hit. 

According to the latest financial release from the firm, Danke's net loss totaled 1.23 billion yuan (8.7 million) for the first quarter of 2020. That loss was deeper than the 816.24 million yuan in the same period a year earlier (4.7 million in 2020 dollars).

Danke did not respond to CNBC's two requests for comment requesting clarity on the health of its company. In a statement released by the company via the Chinese microblogging website Weibo on Nov. 16, Danke said it was not bankrupt and will not run away," encouraging people not to believe the "rumours," according to a CNBC translation of the Mandarin comments. 

Phoenix Tree Holdings, the parent company, went public on the New York Stock Exchange at .50 a share in January, and has since seen its stock price crash by 76.5 percent. The stock closed on Thursday at .17, taking the market capitalisation of the firm to just under 0 million. 

Development fuelled by debt

Renters working with Danke also after taking out a loan, pay monthly instalments to the banking partners of the company. 

In 2019, according to a company filing with the U.S., 65.9 percent of Danke's tenants had rent-financing arrangements in effect. Commission for Securities and Trade. In light of the new regulations, that number was lower than in previous years, but high. Residential rental companies such as Danke are mandated by regulations that came into force last year to ensure that no more than 30 percent of their rental income is generated from rent financing. 

In its 2019 annual report, Danke said that by the end of 2021, it plans to reduce the ratio to below 30 percent.

Average monthly revenue per leased unit dropped more than 9 percent from a year earlier in the March period, while the occupancy rate of Danke's properties also fell from 77.8 percent the year before to 75.6 percent. The most recent estimates available from the company are first-quarter figures. 

Meanwhile in the event of early termination of leases or defaults by tenants, upfront payments that were returned to partner banks ballooned from a total of 1,76 billion yuan in 2018 to 2,81 billion yuan in 2019, according to a Danke filing. 

Media reports in China have started asking concerns about the financial health of Danke. According to a November article in the Chinese business publication Caixin, Danke has refused to pay some landlords their rent, adding that some property owners have responded by attempting to evict tenants. 

The storey of Danke is not an isolated event. With tenants taking out loans and paying a year's worth of rent upfront, Rival Qingke uses a similar business model. In a statement in May, Qingke, which is listed on the Nasdaq, said it was facing "financial difficulties," but according to a CNBC translation, the company still operates normally. 

The share price of Qingke has also taken a hit and has been down more than 79 percent since its November IPO. 

Social network complaints

According to a CNBC translation of those messages, the popular Chinese social media app Weibo shows hundreds of complaints from individuals claiming to be former tenants who were kicked out of their apartments by landlords who did not get rent from Danke. 

In November, KrAsia, the technology news publication, announced that landlords and tenants were waiting to get their money back at Danke's Beijing headquarters. 

On its part, WeBank said this month that for all Danke tenants who have taken out a loan, it will waive interest payments until 2023. 

When contacted by CNBC, WeBank said it had no further comment. This year, Danke, which has big backers such as Ant Party, an affiliate of Alibaba finance, has seen other issues pile up. 

The company's investor relations team announced in a statement in June that its former CEO Jing Gao was under investigation by "local government authorities on certain issues relating to his business venture before the founding of Danke."

Danke added that the ongoing inquiry into Gao "relates to or results from any business activity or other dealings" at the property company "has no plausible reason to believe."