China’s Evergrande needs to make better use of money, analysts say

Cash is so important to debt-ridden mainland Chinese developer Evergrande Real Estate Group that it traded record price for better payment terms in the recent purchase of a Hong Kong office tower, industry analysts said.

But investors refused to buy the idea and its shares plunged 8.9 per cent at one point on Friday, after it announced the previous day it would pay HK$12.5 billion for the 26-storey MassMutual Tower in Wan Chai in Hong Kong’s most expensive office transaction on record.

Evergrande took pride in the payment of “only a small amount” in each of the next six years, as only 40 per cent will be due upon completion of the deal, which the developer hopes will lift its corporate image in the city as well as other parts of the world.

Evergrande has been pictured by some global investors since its public listing in 2009 as too aggressive in its debt-fuelled expansion.

“Evergrande stands out with its high efficiency in raising cheap onshore bonds; in turn improving its debt cost. Robust sales also support its stock. But the MassMutual Tower acquisition may be too aggressive,” said Jefferies property analyst Venant Chiang.

JP Morgan property analyst Ryan Li said Evergrande probably views the asset as a property in scarcity and that they do not mind paying a substantial premium for better payment terms as the management’s primary focus is on cash flow.

The Guangzhou-based developer declared “cash is king” in its interim report, which showed cash on hand totalled 81.57 billion yuan as of the end of June, the highest level since its listing in Hong Kong.

However, debts totalled 185.3 billion yuan, including 100.8 billion that will become due before the end of next June.

“The group will strictly control its costs and expenses in every aspect, strive to increase the total amount of cash and profit margin, and stay devoted to controlling its debt ratio," Evergrande said.

However, a report by Bank of America Merrill Lynch estimated its net gearing ratio fell to 230 per cent -- still high -- after a share placement in May, raising HK$4.6 billion by pricing it at HK$5.67 apiece.

After that, Evergrande has also been able to raise 40 billion yuan in the domestic bond market, at less than half the cost it paid for an offshore issuance of US$1 billion in February.

The company has also listed its loss-making football club in Shenzhen-based National Equities Exchange and Quotations System, the country’s so called new third board. It is still waiting for the go-ahead to list the cultural business on the same board.

Alongside the massive fundraising activities, Evergrande has been spending billions to shore up its share price since June, amid the mainland’s stock market rout that rippled across the rest of the world.

In November alone, the company has bought back 469 million shares as of Monday, spending at least HK$2.89 billion, based on the lowest prices -- all higher than the May share placement price -- during the days when it conducted the repurchases.

The company’s share price is up 100 per cent this year, far outperforming its peers and the benchmark Hang Seng Index. But the share remains shy of the year high level of HK$8.4 per share hit on May 5.

“We believe there could be better use of capital, instead of buying offices in Hong Kong and excessively repurchasing shares at a premium to the last placement,” said JP Morgan’s Li. “Hence from an equity holder’s standpoint, we remain negative on the stock.”