Evergrande Shares Fall as Developer Piles on Debt to Expand

  • Company says debt increased because of land acquisitions
  • Developer funded growth with ``explosion of debt:'' Citigroup

Evergrande Real Estate Group Ltd. shares dropped as the Chinese developer said its debt mounted last year to fund acquisitions, raising concerns it will be able to maintain sustainable growth.

The stock fell as much as 1.8 percent in Hong Kong, the biggest intraday decline in two weeks, and traded 0.7 percent lower at HK$5.96 as of 1:43 p.m. local time. That compares to a 2.3 percent increase in the Hang Seng Property Index. The Guangzhou-based developer’s debt increased, partly due to land acquisitions, Chief Financial Officer Tse Wai Wah said in Hong Kong Tuesday. The firm almost doubled its borrowings to 297 billion yuan ($45 billion) at the end of last year and its foreign-exchange losses from borrowings rose to 2.84 billion yuan in 2015, according to a statement accompanying its annual results.

Evergrande, majority-owned by billionaire chairman Hui Ka Yan, was the most active buyer among listed developers last year after accounting for more than one-quarter of $25 billion in transactions, including paying a record price for the Mass Mutual Tower in Hong Kong, according to data compiled by Bloomberg. The strong acquisitive appetite, largely funded by debt, prompted Moody’s Investors Service to cut its rating by one notch in January to B2.

Despite strong contracted sales after the aggressive acquisitions, the company funded growth with an “explosion of debt,” Citigroup Inc. Hong Kong-based analyst Oscar Choi wrote in a note Wednesday, estimating the firm’s total liabilities rose 70 percent to 564 billion yuan.

Debt Laden

Net gearing, a measure of financial leverage, jumped 40 percentage points to 409 percent at the end of last year, if considering its perpetual notes as borrowing, according to estimates by Alan Jin, a Hong-Kong based analyst at Mizuho Securities Asia Ltd. Evergrande’s balance sheet weakened, as a 60 percent surge in the value of its assets was mainly funded by debt and the equity attributable to shareholders remained largely unchanged, Jin said.

On the upside, Evergrande’s contracted sales may increase about 30 percent to 260 billion yuan this year, following a a record high in 2015, according to a note by China International Capital Corp. analysts led by Beijing-based Eric Zhang who upgraded the stock to neutral from sell Wednesday. Most of the projects acquired last year may start sales this year, Zhang said.

Net profit attributable to shareholders dropped to 10.5 billion yuan from 12.6 billion yuan a year earlier, the firm said. Cash and cash equivalents surged 176 percent to 164 billion yuan, helped by strong sales and bond sales after the government relaxed rules to allow developers to tap the onshore debt market last year.

After last year’s buying spree, mergers and acquisitions will become the “major” means of expansion in land reserves as a “cost-effective” approach, the company said in Tuesday’s filing.

— With assistance by Emma Dong

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