Photographer: Zhang Peng/LightRocket via Getty Images

Evergrande Climbs on Plan to Raise as Much as $2.9 Billion

  • Plans to raise another 15-20 billion yuan from investors: CEO
  • Reported a 51% decline in 2016 profit as finance costs rose

China Evergrande Group, the nation’s most indebted property developer, advanced in Hong Kong trading after announcing a plan to introduce as much as 20 billion yuan ($2.9 billion) from strategic investors ahead of a back-door listing on the mainland.

Shares of the Guangzhou-based developer surged 8.9 percent higher to close at HK$6.95 in Hong Kong.

Xia Haijun

Photographer: Anthony Kwan/Bloomberg

The plan came after Evergrande in January locked in eight strategic investors for a total of 30 billion yuan to fund a reorganization for a back-door listing on the Shenzhen stock exchange. The firm expects to complete a second round of financing in May to raise 15 billion to 20 billion yuan, which includes state-backed companies, Chief Executive Officer Xia Haijun said in a briefing late Tuesday.

Consolidating these new investments into Evergrande’s balance sheet will “sharply” reduce its high leverage, the CEO said, as will the completion of its listing on the mainland, which he said is still in the works. The builder is also aiming to repay two-thirds of the 113 billion yuan perpetual securities that eroded profits and increased interest expenses.

“The debt pile didn’t reflect the real picture of Evergrande. We’re not worried about risk,” Xia said in the briefing. “Meanwhile, we promised to improve debt ratio control starting this year. We’ll reduce leverage and fulfill investors’ expectation as soon as possible.”

Cutting Costs

The pledge to repay perpetual notes will significantly save interest expenses and boost earnings in 2017 and 2018, Raymond Cheng, Hong Kong-based analyst at CIMB Securities Ltd., wrote in a note Wednesday, upgrading the stock to a “buy” and raising its target price by more than 50 percent to HK$8.40. 

While Evergrande’s net gearing continued to soar last year and remained the highest among major Chinese developers, its average financing costs decreased modestly to 7.8 percent from 8.4 percent a year earlier, fixed-income analysts at Bank of China Ltd. wrote in a note Wednesday.

Net income declined 51 percent to 5.1 billion yuan in the 12 months ended Dec. 31, from 10.5 billion yuan a year earlier, the builder said in a statement to the Hong Kong stock exchange Tuesday. Soaring finance costs overshadowed gains from record sales, as finance expenses jumped to 11.3 billion yuan, up 278 percent from a year earlier.

Evergrande has pressed ahead with billionaire Chairman Hui Ka Yan’s debt-funded expansion strategy, amassing a 14.1 percent stake in smaller rival China Vanke Co. Earlier this month, the company raised $1.5 billion in the biggest U.S. dollar junk bond offering in Asia since mid-2014, and sold a further $1 billion of bonds last week. The developer, which is ranked four-to-six levels below investment grade by global credit rating companies, has pledged to make a “larger effort” to lower financing costs.

Still, Evergrande has benefited from surging home prices in China amid intense buyer demand and last month raised its pre-sales contract target by 21 percent, the highest among mainland builders. Revenue rose 59 percent to 211.4 billion yuan, beating the 177.3 billion yuan mean estimate in a Bloomberg survey of 22 analysts.

Here are some key takeaways from Evergrande’s earnings:

  • Core profit, adjusted for property revaluations and foreign-exchange losses, jumped 89 percent. 
  • Evergrande’s balance sheet became more stretched. Total borrowings jumped 80 percent to 535 billion yuan. Current liabilities, or debt which needs to be repaid within a year, rose 28 percent to 203 billion yuan.
  • Leverage would be even higher if the company’s perpetual notes were counted as debt rather than equity. Net gearing, if including perpetual notes and excluding minority shareholders, surged to a record 777 percent at the end of 2016, according to calculations based on the results. It deteriorated from a 409 percent level a year earlier.
  • Foreign-exchange losses from borrowings increased to 4.9 billion yuan from 2.8 billion yuan 

— With assistance by Emma Dong, and Lianting Tu

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