China Evergrande looks for ways to boost valuation ahead of upcoming back door listing
China Evergrande Group’s property unit Hengda Real Estate has sold its controlling stake in China Calxon Group after holding it for less than 10 months.
Hengda Real Estate agreed to sell its 52.78 per cent shareholding in Zhejiang-based state-owned developer Calxon to another Evergrande subsidiary, Kailong Real Estate, which is also the parent of Hengda Real Estate, cashing out for a total of 6.2 billion yuan at 6.52 yuan per share.
In April 2016 Evergrande, one of the country’s most indebted real estate developers, purchased a controlling stake in Shenzhen-listed Calxon for 3.6 billion yuan through Hengda Real Estate as part of a series of Evergrande acquisitions of mainland Chinese listed companies.
Analysts at the time believed Evergrande strategy was to procure shell companies to facilitate a “reverse takeover” so it could list on mainland stock exchanges to achieve a higher valuation than its Hong Kong listing, without the need to wait in a long IPO queue on the mainland.
Evergrande later announced it would inject all real estate assets in its Hengda Real Estate flagship into another Shenzhen listed vehicle, Shenzhen SEZ Real Estate, in a planned back-door listing with an estimated market value of nearly 230 billion yuan.
However, the Calxon deal still paid off. After selling the shares to parent Kailong, Hengda Real Estate received a net gain of about 2.6 billion yuan.
Speculative trading in prospective shell companies for back-door listings had pushed Calxon’s Shenzhen shares up by as much as 162 per cent to 12.99 yuan from 4.58 yuan. To date, the stock is still 78 per cent higher than its price in April last year.
“The sell-off will help boost Hengda Real Estate’s profits so it can raise more money from investors when it is listed,” said Liu Feifan, a property analyst with Guotai Junan Securities in Shenzhen.
However, short-term trading by Evergrande triggered regulatory scrutiny.
Evergrande Life, an insurance arm of Evergrande, was admonished by the China Insurance Regulatory Commission (CIRC) for the negative effects the company’s speculative, short-term trading activities were having on the industry. The regulator ordered the insurer to stick to long-term investments.
Prior to the regulator’s action, Evergrande Life had been snapping up shares of a handful of Shenzhen and Shanghai-listed companies in order to “pump and dump”.
To drive up its own valuation, Evergrande secured eight strategic investors to fund its planned back-door listing in Shenzhen.
The investors, who contributed 30 billion yuan in total, will jointly own 13.16 per cent of the enlarged equity interest in Hengda Real Estate. After the deal is completed, Evergrande’s core real estate business could be valued at 228 billion yuan, more than four times its current valuation in Hong Kong.
“The capital increase will serve to raise funds,” said Hui Ka-yan, chairman of Evergrande.