The next Wanda? Evergrande is behaving like it plans to delist in Hong Kong and head for Shanghai
High offshore debt levels and its red-chip status are believed to be obstacles in any ambition for a Shanghai listing
Evergrande Real Estate is actively acquiring stakes in a number of mainland Chinese listed companies, in what may be a part of wider strategic shift to move its equity listing to Shanghai from Hong Kong, although the company’s status as a red chip and its huge offshore debt presents major obstacles, according to analysts.
Evergrande, China’s second-largest home builder, announced Sunday it would take over Zhejiang-based state owned developer Calxon Group, listed in Shenzhen, by purchasing 52.78 per cent of total shares for 3.6 billion yuan (HK$4.3 billion).
Two weeks ago it bought a 5 per cent stake in Shanghai-listed developer Langfang Development. More recently, its subsidiary Evergrande Life increased its stake in Shenzhen Bauing Construction, listed in Shenzhen, to 6.25 per cent.
The market is curious if Evergrande will follow Wanda Commercial Properties. Wanda, which is controlled by China’s richest man Wang Jianlin, announced a plan to delist its shares from Hong Kong and it has submitted application to list on exchanges in the Chinese mainland.
“It would be very difficult for Evergrande to go private,” said Raymond Cheng, a property analyst at CIMB Securities.
Cheng said Evergrande’s status as a red-chip firm rather than an H-share company, like Wanda Commerical, makes it technically very complicated to transfer business control from an offshore entity to onshore.
H-share companies are traded in Hong Kong but incorporated in mainland China, while red chips, also traded in Hong Kong, are incorporated outside the mainland. Evergrande is registered in the Cayman Islands.
Evergrande’s huge offshore debt is also a big concern. According to Citi, Evergrande has at least 59 billion yuan in offshore debt at the end of 2015.
If Evergrande wants to relocate to the Chinese mainland, it must achieve agreements with lenders to switch the borrowing entity from offshore to onshore, Cheng said.
“It is more likely it would inject some assets to A-share platforms,” he added.
Mainland Chinese stocks markets are seen as increasingly attractive for developers which feel undervalued in Hong Kong.
The Hang Seng China AH Premium Index, which measures the valuation difference between Chinese shares traded in China and Hong Kong, shows a 33 per cent premium on mainland shares compared with their Hong Kong counterparts.
Evergrande’s competitor China Vanke trades at 15 times earnings in Shenzhen, versus Evergrande’s market valuation in Hong Kong of seven times earnings.
“It will not be a surprise if Evergrande were to express its intention to privatise,” said Oscar Choi, a property analyst at Citi Research in a note last week.
He noted that Evergrande Chairman Hui Kayan is aware of the relative undervaluation of Hong Kong shares versus mainland counterparts.
Guangzhou R&F Properties and State-owned Beijing Capital Land are reported to be actively seeking to list on the mainland stock markets.
Choi said he expects more companies to seek out listings on mainland markets for similar reasons.