HongKong-listed China EvergrandeGroup is seeking to tap the mainland Chinese investor base byorchestrating a possible backdoor listing.
On Oct.3, the company, one of China's largest property developers by sales and assets,entered into an agreement to inject subsidiary Hengda Real Estate GroupCo. Ltd. into Shenzhen Special Economic Zone Real Estate & Properties(Group) Co. Ltd. in exchange for new shares issued by the Shenzhen-listedShenzhen Special Economic Zone Real Estate and potentially some cash. Once thedeal closes, Evergrande will indirectly control Shenzhen Special Economic ZoneReal Estate.
Whiledetails about the assets involved in the deal were not disclosed, , a foundingcomponent of Evergrande that also bears its Chinese corporate name, is believedto hold most of the group's property assets on the mainland, according toindustry experts who spoke with S&P Global Market Intelligence. Thatmeans Evergrande would be able to use the Shenzhen-based group as anonshore-listed platform for its core property business, a strategy that couldpotentially help it realize a higher valuation and strengthen its equity base,Hengtai Securities analyst Fu Shaoqi said in an interview.
Stockslisted on the mainland generally attract more speculative domestic retailinvestors and tend to trade at higher equity premiums than their peers listedin Hong Kong, where institutional investors and foreign capital are the majormarket influencers.
Asof market close Oct. 5, the HangSeng China AH Premium Index, which gauges the valuation gap betweencompanies dual-listed in Hong Kong and mainland China, indicated that shares onthe mainland are approximately 19% more expensive.
Thissignificant price difference spurred Dalian Wanda Group to its property development arm,Dalian Wanda CommercialProperties Co. Ltd., from the Hong Kong Stock Exchange in Septemberto prepare for a relisting on the Shanghai exchange in search of betterreturns. The shopping mall giant's stint on the Hong Kong exchange lasted onlyabout 21 months, after it raised US$3.7 billion in a blockbuster in December 2014.
Evergrande'splan to tap China's higher valuations awaits approvals from various regulatorsand shareholders, and the proposed deal could face additional hurdles.
Evergrandeplans to reorganize Hengda Real Estate into a mainland-listed platform, but itwill likely keep the listing status of its Hong Kong-listed arm active, RHB OSK Securities analystToni Ho said in an interview. This could make the deal less appealing toinvestors as an enlarged share base dilutes earnings per share.
Withthe core property assets injected into a mainland entity, Evergrande's HongKong-listed arm could be left with only a few real estate assets and somesmaller business lines, such as insurance and healthcare. It will have to provethat these business operations are substantial and independent from itsproperty business, or else Hong Kong's stock regulator may not approve a pureholding company structure, Ho said.
Ifthe deal does go through, it could help diversify the funding channels of thedebt-laden developer, whose net gearing surged to 605% in the first half from409% at 2015-end, according to Macquarie Research data.
Withan aggressive debt-funded expansion appetite in recent years, Evergrande hasbeen on a spending spree, buying real estate projects and branching out into a string of businesslines, includingsolar power, magazine publishing and consumer goods. It itself China Evergrande Groupfrom Evergrande Real Estate Group to reflect its diversified business strategy.
However,the company is now reversing course. Last week, Evergrande unveiled a2.70-billion-yuan sale of certain noncore assets, including interests ingrain and oil, dairy products and springwater, with an aim to renew its focuson property development.
"Thechange of strategic focus, together with latest proposal of assetreorganization, will hopefully reduce the company's debt growth and bringimproved operation of its property business," said Fu.