Photographer: Qilai Shen/Bloomberg

Evergrande Jumps Most Since July 2015 on Asset Injection

  • Proposed backdoor listing of property assets into A-share
  • Evergrande could realize higher valuations through deal

China Evergrande Group surged by the most since July 2015 in Hong Kong after the developer announced a plan to inject assets into a property company listed on the Chinese mainland, taking advantage of higher valuations there.

Evergrande rose as much as 12 percent to HK$5.87 in Hong Kong trading, and traded 6.7 percent higher as of 10:25 a.m. on Tuesday. The advance pared this year’s decline to 18 percent. The company’s 8.75 percent bonds due in 2018 jumped 0.5 cent on the dollar, the sharpest increase since Sept. 22, to 103.9 cents, according to prices compiled by Bloomberg.

Evergrande-owned Kailong Real Estate will sell a unit called Hengda Real Estate, which owns most of Evergrande’s real estate assets in China, to Shenzhen Special Economic Zone Real Estate & Properties Group Co. and be paid in stock, according to a statement to the Hong Kong Stock Exchange on Monday. The transaction will make Kailong a controlling shareholder of Shenzhen Real Estate.

Companies including Wang Jianlin’s Dalian Wanda Commercial Properties Co. are pursuing listings in mainland China, where companies command higher valuations than counterparts listed on the Hong Kong exchange. The proposed restructuring would enable Evergrande to inject its property assets into the Shenzhen-listed company, and realize a potentially higher valuation, according to a research note from JPMorgan Chase & Co.

“We have previously emphasized the high potential for 3333 HK to inject real estate assets into any A-share listing,” according to JPMorgan’s note, which referred to Evergrande by its stock ticker on the Hong Kong exchange. JPMorgan said the deal may meet resistance from both Hong Kong and Chinese stock regulators.

‘Backdoor Listing’

Evergrande’s price-to-book ratio at the end of the third quarter was 1.42 times, while Shenzhen Real Estate’s was 4.58 times, according to data compiled by Bloomberg.

CIMB Group Holdings Bhd., in a research note, described the move by Evergrande as a “backdoor listing of its property assets on the A-share market.” The completion of the transaction is “highly uncertain” because it requires approvals from various parties including Chinese and Hong Kong regulators.

Buying Spree

Evergrande, controlled by Chinese billionaire chairman Hui Ka Yan, has been on a debt-funded buying spree in the past year. It built up its land bank in China and bought shares in other developers, including a 7.74 percent stake in China Vanke Co. The deal with Shenzhen Real Estate comes as large developers are acquiring smaller ones as the industry consolidates.

Evergrande’s debt-to-equity ratio soared to 605 percent in June from 409 percent in December, compared with an average of 62 percent for the other 10 largest mainland property developers listed in Hong Kong, according to Bloomberg Intelligence.

The proposed reorganization will provide an additional fund-raising platform for Evergrande, will be beneficial to the company and will enable the market to assess its value “positively and reasonably,” according to the statement.

Shenzhen Real Estate has a market capitalization of 10.55 billion yuan ($1.58 billion), according to data compiled by Bloomberg. Evergrande’s market value is HK$71.7 billion ($9.25 billion).

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