China property

Evergrande shares plunge in Hong Kong as buyback close to breaching free float requirement

PUBLISHED : Thursday, 27 April, 2017, 2:04pm
UPDATED : Tuesday, 30 May, 2017, 6:08pm

Mainland Chinese property tycoon Hui Ka-yan has spent more than HK$6 billion yuan (US$871 million) in the past month to boost the share price of his China Evergrande Group in Hong Kong, but the plan is seemingly backfiring now that the buyback is reaching the upper limit set by the city’s securities regulator, sending the stock plummeting.

The company, China’s largest homebuilder, spent HK$6.3 billion to buy 5.3 per cent of its shares over the past four weeks, during which time the stock rallied by 40 per cent. The move was designed to ensure a high valuation for the backdoor listing of its property assets in Shenzhen.

However, Hui’s efforts are being reversed as the market believes the buyback is reaching the limits of what is allowed under the public float requirement.

Evergrande shares plunged 5.5 per cent to close at HK$8.22 Thursday, the biggest intraday decline among its peers, following a 6 per cent drop on Wednesday.

“It should hit the minimum free float soon,” JP Morgan analysts led by Ryan Li wrote in a note on Wednesday. JP Morgan estimates Evergrande has a public float requirement of 22.04 per cent, which means the developer can only buy back another 4.2 million shares.

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

Evergrande disclosed after trading closed on Wednesday that it has spent 400 million yuan for 4.6 million shares, so the repurchase programme may have reached its limit already.

Li said the buyback accounted for 50 per cent of Evergrande’s trading volume during the April 19-25 period, and when the buyback activity didn’t start at the beginning of the day the stock came under selling pressure.

“Evergrande may have already caught the attention of Hong Kong’s securities regulator,” said Philip Tse , a property analyst at Bocom International. “[The regulator] may implement some restrictions on its buyback behaviour to avoid the high ownership concentration.”

Hui, as Evergrande chairman, already controls over 75 per cent of the existing issued share capital.

The developer is planning to inject Hengda Real Estate, the unit that owns most of its mainland property, into a Shenzhen listed vehicle to return to the mainland A-share market.

Evergrande may have already caught the attention of Hong Kong’s securities regulator
Philip Tse, property analyst at Bocom International

A 30 billion yuan first-round of pre-IPO financing gives Evergrande’s property assets a market value of nearly 230 billion yuan, double its valuation in Hong Kong.

The group is close to securing 15 billion yuan in second round funding from state-owned investors.

Analysts expect the A-share restructuring to be completed before August, but the low valuation in Hong Kong could cast a shadow over its mainland listing process, especially in terms of the valuation.

However, based on fundamentals, many believe Evergrande’s shares are already too expensive.

“Most mainland developers’ shares have a 10 times P/E ratio in Hong Kong, while Evergrande’s has reached 20 times,” Tse said.

JP Morgan’s Li said they don’t see an incentive from the company in the near term to lower gearing to a point which makes investors comfortable re-entering the stock again.

Evergrande’s over 400 per cent gearing ratio is one of the highest among its competitors. The developer last month vowed it would start deleveraging by repaying part of its high-interest perpetual bonds.

In contrast, Nomura lifted its target price for Evergrande from HK$5.58 to HK$9.95 this week, citing the improved quality and profitability of the developer’s property projects.