- The Chinese developer bought 5.59 percent of lender in March
- Shengjing among few China banks with consumer-finance license
Evergrande Real Estate Group Ltd. agreed to buy Shengjing Bank Co. domestic shares worth 10 billion yuan ($1.54 billion), extending a shopping spree by the Chinese developer facing mounting debt.
Evergrande will lift its stake to 27.2 percent after acquiring just over 1 billion shares from five shareholders through a unit, the firm said in a filing to the Hong Kong stock exchange on Thursday. Shengjing Bank received approval in January from China’s banking regulator for a consumer-finance firm, one of a handful of banks to hold such a license, Evergrande said in the filing, adding it expects the purchase to generate high returns.
Under Chairman Hui Ka Yan, one of China’s richest men, Guangzhou-based Evergrande has embarked on a spending spree that has seen the developer’s debt swell. Evergrande may want to improve its access to funding and securing a stake of more than 20 percent also means that it can record a share of Shengjing Bank’s profits in its earnings.
“Becoming a major shareholder of a bank helps Evergrande gain easier access to funding,” Ross Lee, a credit analyst at Bank of China Hong Kong Ltd., said by phone. “It seems like the company is aiming to have a controlling stake in the bank eventually, forming its own ‘Evergrande Bank.’"
Evergrande is paying 10 yuan a share for the stake, equivalent to a 7.8 percent premium to Shengjing Bank’s closing price in Hong Kong on Wednesday, data compiled by Bloomberg show. Industrial & Commercial Bank of China Ltd. shares trade at a 20 percent premium in Shanghai to their Hong Kong price.
It’s one of a string of acquisitions. Evergrande agreed earlier this month to pay 3.6 billion yuan for a stake in China Calxon Group Co. Last year, it bought Mass Mutual Tower in Hong Kong for HK$12.5 billion ($1.6 billion), the most ever paid for a commercial building in the city, as well as agreeing to buy 13.5 billion yuan of assets from New World China Land Ltd.
Shengjing Bank fell 0.7 percent as of 11:42 a.m. in Hong Kong. Evergrande was unchanged.
The transaction will be funded by internal resources, Evergrande said. The developer, through a subsidiary, paid HK$3.89 billion for 5.59 percent of Shengjing Bank last month, saying in a statement that the acquisition was a “reasonable investment.”
Chinese developers have been scouting for cash-yielding assets, such as insurers, after soaring land costs helped push them further into debt. Evergrande, in November, bought a 50 percent stake in Great Eastern Life Assurance Co.’s Chinese joint venture for 3.9 billion yuan.
Banks could serve as an alternative financing vehicle as onshore funding is becoming expensive, Toni Ho, an analyst at RHB OSK Securities Hong Kong Ltd., said by phone. It’s “likely” more developers will acquire stakes in commercial banks or insurers, Ho added.
The company has become the most indebted of 198 listed Chinese real estate developers, Bloomberg-compiled data show. There is a 6.2 percent probability it will miss payments in the next 12 months, up from 1 percent a year ago, according to the Bloomberg Default Risk model that tracks metrics including share performance, liabilities and cash flow.
Evergrande had negative free cash flow of 22.3 billion yuan in the second half of last year, up from a negative 16.5 billion yuan in the first half, according to data compiled by Bloomberg from the firm’s financial statements.
The developer “generates very large negative free cash. Hence, the acquisition will ultimately be funded by increased debt,” Charles Macgregor, head of Asian high-yield research in Singapore at Lucror Analytics, wrote in a note, maintaining a hold rating on the stock.
Evergrande’s $1.5 billion 8.75 percent 2018 notes rose 0.2 cents on the dollar to 97.3 cents, the biggest jump since April 14.
— With assistance by Lianting Tu, and Emma Dong