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

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.