Was Danke Doomed to Fail?
Could Danke's J-Curve Have Rebounded Without The COVID-19 Pandemic?
Are Rent Financing Schemes to Blame for Danke's Downfall?
We also reflect on some of the lessons learnt and issues brought up from this corporate phenomenon:
Registration-Based vs. Regulator-Based IPO System
Intervention vs. Innovation
Lastly, we consider the question Will There Be Another Danke? by looking at Qingke (NASDAQ: QK), a similar long term Chinese real estate company that expanded aggressively through the use of rent loans and is currently on the brink of collapse.
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A Recap of Danke
History and Purpose
Danke was founded in 2015 with the launch of Danke Apartment, a long term rental accommodation scheme that particularly attracted young working professionals with standardized apartment properties, reliable third-party contractor services, and a supposed emphasis on technology as part of the corporate goals of providing centralization and standardization to China's residential real estate market. The company leases apartments from landlords throughout various major cities in China, renovates the properties to a high standard, and rents the rooms out while also providing quality services as needed.
Rapid Growth and Expansion
Danke expanded very rapidly from only 2,434 Danke Apartment units in Beijing in December 2015 to 438,309 units in 13 cities four years later. This rapid expansion was largely possible because Danke encouraged renters to pre-pay multiple months' worth of rent in advance, with the majority of pre-payments being done through the form of three-way rent loans with partner financial institutions. Specifically, renters who did not have the financial resources to pre-pay their rent could opt to enter into rent financing schemes with Danke and a partner bank, whereby the bank would grant Danke an upfront loan equal to a year's worth of rent, which the renter would gradually pay back to the bank with their monthly rent payments.
Without any regulatory restrictions on the timing or usage of rent loan proceeds, Danke was able to use each entire upfront loan payment from partner banks all at once to lease more properties, while continuously attracting new landlords by promising higher than market rate lease payments and guaranteed rents even in the case that a property could not be rented out. These lucrative perks attracted many property owners to rent their properties out through Danke, and fueled the company to quickly reach monopoly status in key residential areas across many Chinese cities.
Since its inception in 2015 to the end of 2019, Danke received six rounds of financing from notable Chinese venture capital firms and other investors, including Ant Group. The company filed for an IPO on the New York Stock Exchange with an eventual opening share price of $13.5 per share on January 17th, 2020.
The Financial Dark Side Revealed
A look at Danke's financial statements, however, reveals a multi-faceted dark side to the seemingly successful, growing business with multiple warning signs that should not have been ignored. Most noticeably, Danke's operating expenses have been exploding at over 100% of the company's revenues each year, of which leasing costs constituted 78% to 90% during the 2017 to 2019 period. The exorbitantly high operating expenses translate into net losses of RMB272 million, RMB 1.37 billion, and RMB3.4 billion in 2017, 2018, and 2019 respectively.
Deeper investigation reveals that Danke's cash flows are highly unsustainable due to a severe maturity mismatch, where the company had been depending on one-off financing cash inflows from upfront rent loans to support its long term capital intensive expansion and operating losses. Danke's liquidity position has also been in a dire state since 2017 (the earliest data available), with the company's cash and restricted cash balance accounting for only 18.43%, 53.46%, and 26.54% of current liabilities in 2017, 2018, and 2019 respectively.
A Scandalous Reputation