China property

Evergrande seeks higher valuation, capital in Shenzhen via back door listing

Evergrande to inject its assets into Shenzhen SEZ Real Estate

PUBLISHED : Monday, 03 October, 2016, 6:32pm
UPDATED : Monday, 03 October, 2016, 10:58pm

China Evergrande Group, one of the country’s most indebted real estate developers, is returning its stock market listing from Hong Kong to Shenzhen in search of higher valuations, in a plan to help it raise capital more easily.

Evergrande will inject its assets in Hengda Real Estate Co. into Shenzhen Special Economic Zone Real Estate & Properties Co. in return for shares, which will make Evergrande’s Kailong Real Estate unit into the controlling shareholder of Shenzhen SEZ Real Estate, according to a statement to the Hong Kong Stock Exchange.

The transaction transfers Evergrande’s core assets into Shenzhen SEZ Real Estate, giving it access to a capital market whose prices are trading at 46 times 2015 earnings, more than triple the P/E ratio on the Hang Seng Index, and almost six times the valuation of the Hang Seng China Enterprises Index, commonly known as H shares.

“Mainland market gives a much higher valuation to real estate firms,” said John So, a property analyst at China Merchants Securities. “A better valuation leads to more financing.”

Trading in Evergrande shares were halted in Hong Kong before the company announced its acquisition, without disclosing financial details. The Shenzhen stock exchange was closed Monday to mark China’s national day public holidays.

Evergrande, owned by Chinese billionaire Hui Ka Yan, has been on a debt-funded buying spree in the past year, with its net gearing surging to 430 per cent in June, from 314 per cent six months earlier, according to Bank of America-Merrill Lynch.

The Guangzhou-based company has been building up a land bank in China, and emerged from nowhere to amass a 6.8 per cent stake in China Vanke Co., the country’s largest developer.

The proposed reorganisation will provide “an additional fund-raising platform” for Evergrande, and will enable the market to assess its value “positively and reasonably,” chairman Hui said in the company’s statement.

Evergrande’s shares trade at 20.6 times 2015 earnings, giving the company HK$71.7 billion (US$9.2 billion) in market capitalisation. Shenzhen SEZ Real Estate trades at 45.3 times 2015 earnings, with a market value of 10.55 billion yuan (US$1.58 billion)

Evergrande’s shares in Hong Kong tumbled 23 per cent so far this year, with the price to book (P/B) ratio only 1.2 times. While even little known Shenzhen Real Estate, its P/B ratio is nearly 5 times in mainland market.

The transaction is subject to the approvals by the boards and shareholders of both companies, as well as regulators including the China Securities Regulatory Commission and the Shenzhen State-owned Assets Supervision and Administration Commission, which controls Shenzhen SEZ Real Estate.

Hengda stands to report an estimated 24.3 billion yuan (US$3.6 billion) in 2017 net profit after the transaction, with earnings poised to rise to 30.8 billion yuuan in 2018 and 33.7 billion yuan in 2019, according to Evergrande’s statement. The developer, China’s second largest, will compensate Shenzhen SEZ Real Estate if Hengda’s profit is less than 88.8 billion yuan three years after the deal.

Evergrande is unlikely to delist from Hong Kong, as chairman Hui will likely use the status as a platform to facilitate his diversification strategy, said Guotai Junan Securities’ property analyst Liu Feifan. The developer’s businesses have expanded into finance, energy, culture and healthcare over the past few years.