China Evergrande funded Vanke share purchases from its property sales, says CEO

China Evergrande Group said its 14.6 billion yuan worth of stock purchases in larger rival China Vanke were fully funded by its own property sales as it deflected concerns over its surging debt levels.

The mainland’s second largest home builder came under scrutiny earlier this month when it increased its stake in China Vanke to 6.82 per cent, making it the third largest single shareholder in the country’s biggest home builder.

“Our investment in Vanke has already brought good returns to our shareholders,” said Evergrande chief executive Xia Haijun at an earnings briefing on Tuesday.

Vanke’s Shenzhen-listed shares closed at 22.66 yuan on Tuesday, 17 per cent up from Evergrande’s average cost of 19.4 yuan per share.

The Evergrande relationship with Vanke’s senior management is good, said Xia, but he declined to speculate on Evergrande’s next move amid the ongoing Vanke shareholder battle.

Evergrande saw its first-half net profit slump by 78.6 per cent to 2.02 billion yuan. Core profit, excluding fair value and currency exchange factors, fell 23 per cent to 7.8 billion yuan, while total revenue was up 12.6 per cent to 87.5 billion yuan.

“The bottom line was weighed down by the heavy use of perpetual bonds,” said Raymond Cheng, a property analyst at CIMB Securities.

Evergrande has relied heavily on debt-fuelled growth. By the end of June its perpetual bond had soared to 116 billion yuan from 76 billion yuan a year ago.

As a result, profit attributable to perpetual capital instruments rather than shareholders climbed 61 per cent to 4.2 billion yuan in the first six months.

“If we hadn’t determined to acquire land by high leverage, we wouldn’t have accumulated a land bank of 180 million square metres, beating any other developer. That will secure us a high growth in sales in the next 3-5 years, and the gearing will come down in that time,” Xia said.

He added that the developer will no longer issue perpetual bonds as it has already obtained enough land.

If perpetual bonds are included, Evergrande’s actual debt level surged to about 600 per cent as of June 30, 2016, from 350 per cent at the end of 2015, according to CIMB’s estimates.

The company’s total cash increased 29 per cent to 212 billion yuan by the end of June, thanks to strong contracted sales in the first-half.

For the first seven months, Evergrande’s total contracted sales increased 83 per cent to 184.8 billion yuan. The developer raised its 2016 full-year sales target by 50 per cent to 300 billion yuan.

Evergrande shares closed 1.4 per cent higher Tuesday, outpacing a 0.9 per cent gain in the benchmark Hang Seng Index.

Xia said Evergrande would acquire more listed property developers after it bought a major stake in smaller rivals China Calxon Group and Langfang Development.