China Economy

China rental company's shares have cratered 76% this year as the shine of debt-fueled growth fades

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Key Points
  • New York-listed Phoenix Tree Holdings, which owns Danke, has seen its share price collapse more than 76% since its IPO in January.
  • The company leases properties from landlords on a long-term basis and then rents them to other people.
  • But most Danke renters pay a year's worth of rent upfront by taking out a loan — which has caused problems.
The app of Danke Apartment is displayed on the screen of a mobile phone on November 18, 2020 in Yichang, Hubei Province of China. (Photo by/VCG via Getty Images)
Liu Junfeng | VCG | Getty Images

GUANGZHOU, China — A more than 76% share price collapse for its parent company since its initial public offering this year. Questions about its financial health. Clashes between users of its platform. Danke, a Chinese residential rental company, has a debt-dependent business model that is showing signs of strain.

Danke, owned by U.S.-listed Phoenix Tree Holdings, denied last month that it is bankrupt, even as it faces backlash from the landlords and tenants it serves. Phoenix Tree identifies Danke as the "primary focus of our business" within SEC filings posted on its website and uses the Phoenix Tree and Danke names interchangeably in filings including its quarterly financial results.

Danke, founded in 2015, leases properties from owners on a long-term basis, refurnishes them, and then rents them out. The business model entails getting more money back from renters than Danke has paid to lease the apartment. Danke touts itself as a tech company, claiming that data, artificial intelligence and its IT infrastructure are the "backbone" of its business.

But Danke's tenants often pay a year's rent upfront by taking out a loan with one of the company's partner banks — the biggest being WeBank, which is owned by Chinese internet giant Tencent.

Upfront payments allow Danke to plough money into the business and into renovations. But Danke has yet to turn a profit, and its financials have taken a further hit since the outbreak of the coronavirus.

Danke's net loss totaled 1.23 billion yuan ($188.7 million) for the first quarter of 2020, according to the latest financial release from the company. That loss was deeper than the 816.24 million yuan ($124.7 million in 2020 dollars) in the same period a year earlier.

Danke did not respond to two requests for comment from CNBC asking for clarification on the health of its business.

In a statement the company released on Nov. 16 through Chinese microblogging site Weibo, Danke said it isn't bankrupt and "will not run away," urging people to not believe the "rumors," according to a CNBC translation of the Mandarin comments.

Parent company Phoenix Tree Holdings went public on the New York Stock Exchange in January at $13.50 a share, and it has seen its stock price crash by 76.5% since then. The shares closed at $3.17 on Thursday, bringing the company's market capitalization to just under $580 million.

Debt-fueled growth

Renters who work with Danke often pay monthly installments to the company's banking partners after taking out a loan.

In 2019, 65.9% of Danke's tenants had rent-financing agreements in place, according to a company filing with the U.S. Securities and Exchange Commission. That figure was lower than previous years, but high in light of new regulations. Rules that came into effect last year require residential rental companies such as Danke to ensure that no more than 30% of their rental income derives from rent financing.

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

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In the March quarter, average monthly revenue per rented unit fell more than 9% from a year earlier, while the occupancy rate of Danke's properties also dropped to 75.6% from 77.8% the year before. First- quarter numbers are the most recent available from the company.

Meanwhile, upfront payments that were returned to partner banks in the event of early termination of leases or defaults by residents 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 begun to raise questions about Danke's financial health. Danke has failed to pay some landlords their rent, according to a November report in Chinese business publication Caixin, which added that some property owners have responded by trying to evict tenants.

Danke's story is not an isolated case. Rival Qingke employs a similar business model with tenants taking out loans and paying a year's worth of rent upfront. Qingke, which is listed on the Nasdaq, said in a statement in May that it was experiencing "financial difficulties," but the company is still operating normally, according to a CNBC translation.

Qingke's share price has also taken a hit and is down more than 79% since its IPO in November.

Complaints on social media

Popular Chinese social media app Weibo shows dozens of complaints from people claiming to be former tenants who were kicked out of their apartments by landlords who haven't gotten rent from Danke, according to a CNBC translation of those posts.

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

For its part, WeBank said this month that it would waive interest payments until 2023 for all Danke tenants who took out a loan.

WeBank said it did not have a further comment when contacted by CNBC.

Danke, which has major backers such as Alibaba finance affiliate Ant Group, has seen other problems pile up this year.

Its former CEO Jing Gao came under investigation by "local government authorities into certain matters relating to his business venture prior to the founding of Danke," the company's investor relations team revealed in a statement in June.

Danke added that it has "no plausible reason to believe" the ongoing investigation into Gao "relates to or results from any business activities or other dealings" at the property firm.