China stock market

Evergrande’s Hong Kong shares soar on imminent A-share listing

Investors rushing to buy because of the huge gap currently between company’s HK stocks and the expected valuation of its Shenzhen listing

PUBLISHED : Wednesday, 12 April, 2017, 5:33pm
UPDATED : Wednesday, 12 April, 2017, 10:15pm

Shares in China Evergrande Group, the country’s largest homebuilder, again touched a new all-time high in Hong Kong on Wednesday as the market anticipates the property giant’s planned A-share back-door listing to be completed soon.

Investors are rushing to buy the Hong Kong stocks because of the huge gap currently between those, and the expected valuation of its Shenzhen listing.

The heavily indebted developer’s leverage is also set to decline for the first time in many years, a key catalyst for its stock.

Evergrande shares have gained more than 30 per cent in value over the past 10 trading days, and nearly doubled in the year-to-date.

They touched an all time high of HK$8.73 in Wednesday morning trade, with volumes hitting HK$300 million, before closing 1.9 per cent higher at HK$8.66.

“The A-share listing is progressing smoothly,” said Danielle Wang, a property analyst at DBS Vickers.

As well as homebuilding, Evergrande is also engaged in finance, tourism and healthcare and has been pursuing a spin-off its core property business, to be listed in Shenzhen, through a back-door listing aimed at boosting its valuation.

After a 30 billion yuan first-round of pre-IPO financing, the group is close to finishing a 15 billion yuan second round, analysts say, with the A-share restructuring very likely to be completed before August.

That total 45 billion in pre-IPO financing would give Evergrande’s real estate business a valuation of more than 200 billion yuan, Wang said, while its parent – which will hold about 80 per cent of the A-shares when the spin-off is complete – is valued at HK$120 billion (106 billion yuan) in Hong Kong. “There are still upsides,” she added.

That second round of strategic investors will restricted to state-owned firms, including leading insurance companies, the South China Morning Post has learned.

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

Last month the company’s chairman Hui Ka-yan unveiled an unexpected de-leverage plan during its annual results briefing in Hong Kong – good news for investors as it finally starts focusing on margin improvement rather than growing scale.

It plans to repay half of its more than 100 billion yuan held in perpetual bonds, or high-interest debt, this year and the rest by the end of next year.

“The plan can remove one of Evergrande’s key drags on its bottom line,” said Raymond Cheng, property analyst at CIMB Securities.

Analysts estimate Evergrande’s net gearing ratio will be lowered to about 300 per cent by 2017 from a record 430 per cent at the end of 2016 as a result.

The company reported a net profit for 2016 of 17.62 billion yuan, a modest 1.6 per cent rise from a year earlier, due to its 11 billion yuan in perpetual bond interest payments last year.

If that could be halved, much faster profit growth is forseeable, Cheng added.

Citi this week raised its target price for Evergrande to HK$10 from HK$8.25, citing “multiple positive surprises” in the firm’s 2017 earnings forecast.

Its contracted sales in the first three months of this year continued to be strong at 107 billion yuan, 63 per cent year-on-year growth.

“Evergrande could beat its guidance of 450 billion yuan and even our 500 billion yuan sales estimate for 2017 to retain its top ranking,” Citi analysts led by Oscar Choi wrote.

But Goldman Saches analysts maintain their “Sell” rating on the stock, worried that an estimated 60 per cent of Evergrande’s land bank is now exposed to Chinese government policy tightening.

“2017 will be a challenging year for this highly-geared company with thin profitability,” they said.