Opportunity cost

Evergrande Is Spending Its Way Home

This is a costly game, and time is running out.
As of 10:01 PM EDT
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China Evergrande Group has joined the mainland listing bandwagon as a way to tap heady valuations. To get there, China's most indebted real estate firm is spending precious cash on buybacks to boost its Hong Kong-traded stock.

The developer is planning to inject Hengda Real Estate, the unit that owns most of its mainland property, into a Shenzhen company,  and has locked in eight strategic investors to help fund this backdoor listing.

Until recently, that would have been all there was to the story. But according to Bloomberg Intelligence, a fellow Hong Kong-traded developer, Guangzhou R&F Properties Co., has said that the China Securities Regulatory Commission suggested such listings be done at similar valuations to those in Hong Kong.

Hence Evergrande's buyback scramble: Since March 29, the company has spent HK$3.45 billion ($443.7 million) on five purchases of its Hong Kong stock, helping the shares outperform the market. The developer is no stranger to buybacks, having spent HK$10.3 billion in 2015 and another HK$822 million in 2016, according to Bloomberg Intelligence analyst Patrick Wong, but this latest spree coincided with a spike in the shares.

Ever Rising

An underperforming stock for most of last year, Evergrande's stock has spiked

Source: Bloomberg

China-listed stocks have long commanded higher valuations than their peers in Hong Kong. Real estate shares trade at an average of twice book value on the mainland, against 0.9 times in Hong Kong, says Wong. So once Hengda gets its Shenzhen listing, a higher valuation is likely. While Evergrande currently trades at 2.47 times book, as recently as early March 3 it was at 1.57.

Until that is approved, however, Evergrande's playing an expensive game. Those buybacks are eating into cash that could go toward paying down a mountain of debt. You ignore bondholders at your peril: A doubling of interest payments to holders of perpetuals was to blame for a 51 percent plunge in Evergrande's net profit to 5.1 billion yuan ($740.9 million) last year, when its contracted sales surged 82 percent.

Geared Up

Evergrande's net debt to equity levels have soared in the past couple of years

Source: Bloomberg

A China listing would be a useful piggybank just as hungry bondholders knock on the door and Beijing tries to deflate the real estate bubble. Evergrande, whose debt-fueled binges have included not just land and expensive buildings but also a soccer club, could see its real estate sales gains wither if the curbs start to work.

Unfortunately for Evergrande, it's not alone among developers in looking for a mainland listing. Wang Jianlin's Dalian Wanda Commercial Properties Co, which delisted from Hong Kong late last year, as well as Guangzhou R&F, are reportedly awaiting a green light from the regulator, and neither of those two are anywhere near as indebted.

For Evergrande, the meter is running.

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

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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