Photographer: Justin Chin/Bloomberg

Evergrande Has Ally Against Shorts as Lau Invests $1 Billion

  • Billionaire’s firm accumulates 5% Evergrande stake from April
  • Companies have history of buying assets from each other

Turns out China Evergrande Group, the indebted developer which earlier this year fought off short sellers, had a hidden ally.  

Chinese Estates Holdings Ltd., the company controlled by Hong Kong billionaire Joseph Lau and his family, bought HK$8.1 billion ($1 billion) worth of Evergrande shares since April, Lau’s firm revealed Wednesday as it announced its interest had passed 5 percent. The announcement came a day after Bloomberg reported that Lakewood Capital Management is betting against Evergrande stock.

Purchases by Chinese Estate and Evergrande’s own share buybacks helped billionaire founder Hui Ka Yan beat back bearish investors. Short interest reached 21 percent of the free float in May and has since fallen to 16 percent, according to Markit data. The stock price doubled in the same period.  

Hui Ka Yan

Photographer: Anthony Kwan/Bloomberg

Ties between Lau and Hui go back to at least 2009, when Chinese Estates invested in Evergrande’s initial public offering. Since then, the two companies have sold assets to each other on several occasions. Chinese Estates’ latest investment in Evergrande was an expensive foray: the developer’s stock trades at almost five times the average valuation of its peers by one measure.

“Chinese Estates is returning a favor for Evergrande, whose string of purchases of their assets helped them cash out,” said Francis Lun, Hong Kong-based chief executive officer of Geo Securities Ltd. “It’s known to the market that Chinese Estates is a good friend of Evergrande -- buying shares at such an expensive price is just another sign.”

Evergrande traded at 4.2 times book value as of Tuesday’s close, up from 1.3 times at the end of last year. A Bloomberg Intelligence index of 22 leading Chinese developers shows an average ratio of 0.92 times. The shares reversed early declines after the statement to rise 1.5 percent in Hong Kong. Chinese Estates gained 2.7 percent.

After crossing the 5 percent threshold, Chinese Estates is the second-biggest shareholder in Evergrande, data compiled by Bloomberg show.

“It’s unclear why Chinese Estates bought the shares but it certainly helps lift investor confidence” in Evergrande, said Linus Yip, Hong Kong based strategist with First Shanghai Securities. “The developer’s share gains earlier had forced out many short sellers and prices had been relatively stable in the past month or so, suggesting there’s few shorts left.”

Evergrande became a magnet for short sellers -- investors who aim to profit from an expected slump in the stock -- after an acquisition spree that turned it into China’s most indebted developer. It’s since ceded that mantle to Sunac China Holdings Ltd., and CIMB Securities Ltd. estimated last week that Evergrande’s net gearing may have fallen to 200 percent from 432 percent last year.

Even after short interest fell in past months, the company still has its doubters. In a July 18 second-quarter letter obtained by Bloomberg, Lakewood Capital said a “large portion” of Evergrande’s earnings over the past few years were of “questionable” quality. Evergrande didn’t immediately respond to a request for comment.

Chinese Estates and Evergrande have a history of buying assets from each other. An Evergrande unit agreed in May last year to sell Shengjing Bank Co. shares to Chinese Estates for HK$6.9 billion to restore the lender’s public float. In 2015, Chinese Estates made three property sales to Evergrande, including the 26-story Mass Mutual Tower in Hong Kong’s Wan Chai district, which netted Lau’s company more than HK$20 billion.

— With assistance by Emma Dong, Robert Olsen, Fion Li, Moxy Ying, Amanda Wang, and Kana Nishizawa

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