From owning land, to owning shares

In just over 10 days, China Evergrande Group came from nowhere to emerge as the third-largest shareholder in China Vanke Co., in the process creating 6.18 billion yuan (HK$7.24 billion) in paper gains for itself.

Evergrande’s aggressive move puts its stake within striking distance to take control of China’s largest land owner, or at least gives it a say in who gets to take Vanke’s helm.

For now, Evergrande is keeping mum about its intentions beyond citing Vanke’s “strong financial performance” in a string of stock exchange statements to disclose its ever increasing stakes.

Chairman and chief executive officer Hui Ka-yan (許家印), China’s seventh-richest man of 2016 according to Forbes Hurun ranking, could not be reached to comment.

“Evergrande is in a very good position now,” said Guotai Junan Securities analyst Liu Feifan. “If it exits Vanke, it makes a huge gain from Vanke’s share price increase. If it raises its stake, Evergrande can increase its clout in the company, and even take control of Vanke.”

Evergrande, based in southern China’s Guangzhou city, had been aggressively buying shares in publicly traded companies in the past few months.

Shopping had become more affordable for the developer, already weighed down with almost 300 billion yuan in total debt. The Shanghai A Share Index slumped 20 per cent in the past 12 months, while the Shenzhen A Share Index fell 11.2 per cent in the same period, making the shares of property developers cheaper across the bourses.

The company in April paid 3.6 billion yuan for 52.8 per cent of Shenzhen-listed China Calxon Group Co., and disclosed that it had acquired 15 per cent of Shanghai-traded Langfang Development Co. for 957 million yuan.

The buying spree was partly motivated by Evergrande’s eye on land beyond China’s third- and fourth-tier cities -- urban areas with populations of between 500,000 and 1 million people -- which form the bulk of its current land bank, analysts said.

The rationale behind the shopping spree comes down to simple maths, said Peking University’s finance professor Xu Yuan.

“Major listed property firms typically pay a dividend of more than 4 per cent, more than many wealth management financial products” in China, he said. “ On top of that, there’s possible capital gains if the stock’s price increases.”

Langfang’s share price jumped 81 per cent between July 26 and August 10, while Calxon’s shares rose 40 per cent between August 3 and August 8.

Buying stakes is also a faster way to gain access to land for joint development, compared to bidding for sites through state-run auctions, analysts said.

As much as 70 per cent of the land acquired by Evergrande this year came through the second hand market, with the company rarely making any offers at land auctions, the company’ s Hong Kong deputy general manager Chen Fen said, according to an August 11 report on Sina.com.

As competition intensified in China, developers had to pay more for land. In Shanghai, a metropolis of more than 20 million people, July land sales totaled 25 billion yuan, which translates to developers on average paying double the starting bids to grab land plots.

Evergrande is particularly optimistic about opportunities in the Hebei province between Beijing and the port city of Tianjin, where Langfang calls home. Owning Calxon gives it access to land banks in China’s first- and second-tier cities, defined as urban areas with populations of at least 3 million people, Evergrande said.

“The largest headache for Chinese developers is not liquidity, but lack of land for development,” said Pingan Securities Co.’s property analyst Yang Kan. “Land acquisition is increasingly difficult in first-tier cities, while mergers and acquisitions involve lengthy talks. Buying low-value property shares seems like a good choice to boost their market clout.”

“Evergrande’s acquisitions actually serves as a reminder of how cheap the shares of the real estate industry has become,” said Guotai’s Liu.

Meanwhile, the rising tide has lifted the shares of every real estate developer, boosting the average price-earnings ratio of the industry to 37.7 times from a three-year low of 35 times just two weeks ago, according to data by Wind Information Systems.