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.

Hui Ka Yan may not realize it, but he has a lot in common with Donald Trump. Like the president-elect, the founder and chairman of China Evergrande Group, the country's largest developer by assets, traces his fortune to property and built it on a mountain of debt.

Hui also has a penchant for grandeur and excess.

JPMorgan Chase & Co. slammed his purchase of a Hong Kong office tower as "another example of immature capital management," while Jackson Martinez, the Colombian striker for his Guangzhou Evergrande Taobao Football Club, is one of soccer's top earners. Hui also had to liquidate his five-bedroom mansion complete with infinity pool overlooking Sydney Harbor because the purchase violated foreign investment rules.

The parallels don't stop there, considering many investors in the Chinese company's real-estate bonds are wondering just how sound Hui is financially. Evergrande has not only spent billions buying land, but also a lot of other things, from a mineral-water outfit to an insurance firm and soccer team.

Hui is said to have justified many acquisitions by saying they provide tangible cash flows. In aggregate, however, they've lost money.

The Road Less Traveled
The further Evergrande strayed from its core business, the deeper its losses from those activities
Source: Company filings

Hui, whose net worth is about $7.4 billion, has started disposing of some, listing Guangzhou Evergrande Taobao Football Club and selling the beverages and foods business. He has made some decent returns. According to Evergrande's 2013 annual report, the spring-water company was acquired for 109 million yuan ($15.7 million), and a later filing shows it was sold for 1.8 billion yuan. Including losses incurred during the period takes some of the sheen off, however.

Evergrande's debt-to-common equity has soared from an already high 200 percent four years ago
Source: Bloomberg

Could it be that the 58-year-old developer is starting to feel the weight of debt he's accumulated? Not only is Evergrande's leverage through the roof, it's also not helping returns anymore.

Reverse Order
Despite a rise in leverage, Evergrande's return-on-common equity is at the lowest in years
Source: Bloomberg

One positive resulting from the divestments is that Evergrande is beginning to refocus on its core business of property development. But there's still the propensity for grandstanding. Evergrande has spent the past few months building a 14 percent stake in China Vanke Co., which was the nation's largest real-estate company until Evergrande overtook it. It's unclear what Hui plans to do with that interest. If he pushes for a merger, some of Evergrande's debt woes may be resolved, considering Vanke has managed to build a powerhouse on a relatively conservative balance sheet.

Hui's ultimate aim may be something else entirely, and it is true that some of his most expensive investments in the past have turned out well. He's certainly a man who has strong connections with other property magnates, and is loyal to them.

Much of the $1.6 billion he paid for Hong Kong's Mass Mutual Tower in November 2015, for example, went to Joseph Lau, through Lau's controlling stake in the building's previous owner, Chinese Estates Holdings Ltd. In 2010, Lau helped out Hui, buying $600 million of senior Evergrande bonds.

Similarly, in December 2015, Evergrande purchased some resort projects for 13.5 billion yuan from New World Development Co., which booked a 5.4 billion yuan one-time profit on the transaction. Several weeks later, New World bought $900 million of perpetual notes from Evergrande.

Evergrande continues to find sources of funding, even when its debt levels have garnered a CCC rating on some of its securities, a score associated with imminent default. Bondholders should hope that against the backdrop of softening property prices in Asia's largest economy, Hui has their back, too.

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

  1. The price per square foot was 92 percent higher than the average for office properties in the area.

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Christopher Langner in Singapore at

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