Real Estate

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Glorious Property shareholders are used to turmoil. The Chinese developer's stock dropped 25 percent last year amid privatization speculation and ahead of a maturing bond that at one point seemed wouldn't be repaid.

This week's latest jolt is also familiar. Yet another take-private offer by controlling shareholder Zhang Zhi Rong, who first floated the idea in late 2013, has investors excited. Shares soared as much as 27 percent Friday after Glorious said in a filing late Thursday Zhang was forming a buyout consortium including at least one financial institution that would back the bid. A formal proposal is expected by Oct. 31.

Shareholders shouldn't be cheering. Since Zhang began talking about delisting the company he helped found, its operational performance has deteriorated, making the stock even cheaper. To be fair, there's also been a downturn in Chinese home prices, but the conjecture has been destablizing.

Zhang quit his post as chairman in November 2012 and 12 months later, launched his first bid to take the company private. In January 2014, shareholders rejected it and one month later, the CEO and CFO both resigned.

Things haven't gotten much happier. The company's gross margin was in negative territory by December 2014 -- something that's quite rare in China, where the average net profit margin of large publicly traded developers is over 12 percent -- and Glorious kept borrowing heavily. Its total debt-to-common equity ratio, already at 103.6 percent as of December 2013, has more than doubled.

Spendthrift
Glorious has taken on so much debt that it now owes $2 for every dollar of shareholder equity
Source: Bloomberg

All that has depressed Glorious's stock price:

On Again, Off Again
Glorious shareholders have had a rocky ride as a possible privatization deal looms
Source: Bloomberg

If Zhang really does go ahead with his offer this time, the transaction will be so much cheaper. Not to mention home prices in China have been on the rise recently and sales are accelerating.

Moving In
Home prices in China's largest cities began to decline in 2014 but have since turned positive
Source: Bloomberg Intelligence

Zhang, however, could use what Glorious has to offer, in terms of assets and collateral. His other big investment, shipbuilder China Huarong Energy, formerly known as Rongsheng Heavy, is plying troubled waters. Orders have dwindled since the company became famous for building the giant iron ore cargo ships for Brazilian producer Vale, and there have been attempts to diversify into oil production in Kyrgyzstan.

Huarong Energy's difficulties came to a head in March, when it had to issue stock to repay debt, making Bank of China its largest shareholder in the process, according to Caixin.

Long Way From the Top
China Huarong Energy , 17.8 percent owned by Zhang Zhi Rong, used to be known as China Rongsheng Heavy Industries
Source: Bloomberg

If properly managed, Glorious could have a lot going for it. It's selling two towers of luxury homes in Shanghai's thriving Xuhui district, which may generate a healthy profit, and its roster of completed projects is mainly in first-tier cities, where prices have been climbing. Glorious is also only left with one dollar bond, and that isn't due until 2018, meaning it doesn't have to stump up the cash for a while plus its foreign-currency exposure is reduced.

If Zhang stopped teasing and decided to really focus on turning Glorious around, he'd be doing shareholders a much greater favor than giving them a one-time payout.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net