China’s Danke to be delisted in US

The exchange claims that Danke did not provide requested information in February and in March. It has also “failed to make timely, adequate and accurate disclosures of information to its shareholders and the investing public,” according to a statement. The company has not reported any financial results since the first quarter of 2020.

It has a right to a review of the exchange’s decision and the final delisting must be approved by the US Securities & Exchange Commission (SEC).

Danke raised about $130 million in a smaller-than-expected US IPO in January 2020. It sold 9.6 million shares at $13.50 apiece, below an indicative range of $14.50-16.50. The company was trading at $2.30, one-sixth of its IPO price, when trading was suspended.

Founded in 2015, Danke raised nearly $900 million in private funding. Following the IPO, Tiger Global Management was the largest institutional shareholder with 19.9%, followed by Joy Capital with 15.6%. CMC Group, Ant Group, and Primavera Capital Group owned 9.9%, 8.7%, and 6.5%, respectively.

The company is one of the largest co-living platforms in China. However, there were longstanding doubts about the long-term viability of the business model, which involves securing apartments from individual property owners, renovating them, and then renting them out to tenants.

Profitability has been a key concern. A report issued by DTZ in May 2019 calculated the various costs and concluded that it would be hard to generate a return in excess of 2%. At the same time, China’s benchmark interest rate is around 4% and banks often charge small and medium-sized enterprises 10% or more.

To maintain the growth, these platforms often help tenants arrange rental loans and make lump-sum payments at a certain discount. Rental loans are a means of obtaining low-cost liquidity because personal loans have lower interest rates than SME loans. Danke relies on rental loans for about two-thirds of rental revenue. Problems emerge when platforms go bankrupt, landlords repossess properties, and tenants who paid in advance are left homeless.

Regulators determined that rental loans must not exceed 30% of overall rental income by 2022. Some city authorities took an even stricter view, banning banks from issuing rental loans and requiring that platforms hold a portion of each contract in reserve as a risk mitigation fund. This exacerbated liquidity issues.

Danke was the subject of an investigation in Shenzhen in early 2020, which probed disputes with landlords and rental loan arrangements. Moreover, Jing Gao, the company's founder and CEO, is under investigation for business activities prior to establishing the company, while COO Guodong Gu resigned for personal reasons. Danke faced additional scrutiny after the death of a student who fell from the 18th floor flat he rented in Guangzhou.

The company posted a net loss of RMB1.23 billion ($183 million) for the three months ended March 2020, compared to RMB816.2 million a year earlier. Revenue was up 62.5% at RMB1.94 billion. Revenue for 2019 was RMB7.13 billion, up from RMB2.67 billion the previous year, while the net loss widened from RMB1.37 billion to RMB3.44 billion.

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• Topics
• Greater China
• Consumer
• Technology
• Regulation
• China
• TMT
• Joy Capital
• China Media Capital
• Tiger Global Management
• Primavera
• Ant Financial