Epic rally leaves China Evergrande on shaky ground

Vanke Overseas Investment Holding

12/06/2017 05:09

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) 
    By Quentin Webb 
    HONG KONG, June 12 (Reuters Breakingviews) - An epic share 
rally leaves China Evergrande  3333.HK  on shaky ground. The 
Hong Kong-listed developer is 2017's best-performing major 
stock. Business is brisk, costly perpetual debt is being repaid, 
and a bold mainland listing is on track. It also quit a 
distracting battle for control of smaller rival Vanke 
 000002.SZ   1036.HK . Nonetheless, the current $28 billion 
market capitalisation looks overdone. 
    This year's best stock tip has not been the disrupters of 
global technology, but mainland real estate firms. Of the 
3,000-odd shares in the FTSE All World Index, three of the four 
leaders are developers: Evergrande, Country Garden  2007.HK  and 
Sunac China  1918.HK , up 247, 115 and 111 percent respectively. 
    Some of this may reflect relief that the companies continue 
to thrive despite curbs in China's frothier cities. Evergrande's 
full-year sales for 2016 beat forecasts by nearly one-third, 
Eikon shows. But the fact that Evergrande has also outperformed 
Country Garden and Sunac suggests there's more to the 
developer's rise than revenue growth. The main rally driver is a 
likely backdoor listing of most property assets in Shenzhen, at 
a punchy 198 billion yuan ($29 billion) valuation. 
    Graphic: Hot property: http://reut.rs/2rQXG3B 
    Evergrande pushed the envelope to get here. Aggressive 
buybacks have cut its free float to a minimum 22 percent, 
buoying the Hong Kong stock to ensure the price of the planned 
onshore listing does not look awkwardly high in comparison. And 
it has lured new backers with various guarantees, structuring 
their private shares to resemble high-yielding convertible 
bonds.  
    Evergrande's high debt level makes it volatile, and prone to 
over- and under-shooting. The surge may have also forced some 
short-sellers out, helping propel the shares yet higher. Still, 
this is no penny stock, and the rally will surely raise 
regulators' eyebrows.  
    It should also give any prospective investors pause. The 
momentum has outpaced fundamentals: 2018 earnings and sales 
forecasts have only risen 47 and 25 percent respectively, 
Datastream shows. At HK$16.64 as of Friday's close, the stock 
has outrun all but the most bullish analysts' price targets, and 
a price of nearly 15 times forward earnings is double the 
average of the last two years. Nor is the Shenzhen reinvention a 
done deal. Evergrande is in strange territory. 
 
    On Twitter https://twitter.com/qtwebb 
     
    CONTEXT NEWS 
    - China Evergrande, the country's largest homebuilder, said 
on June 9 it had sold a 14.1 percent stake in smaller rival 
China Vanke for 29.2 billion yuan ($4.3 billion) to Shenzhen 
Metro. Evergrande expects to incur a loss of about 7.1 billion 
yuan on the sale, and will use the proceeds to repay debt. The 
buyer, a state-owned subway operator, will become Vanke's 
largest shareholder.  
    - On June 5, Evergrande said it planned to redeem all of its 
costly perpetual bonds by the end of the month. It has already 
bought back 80.6 billion yuan of the equity-like instruments, or 
71.3 percent of the total.  
    - On June 1, Evergrande said it had secured 39.5 billion 
yuan in a second round of funding from outside investors, ahead 
of a planned backdoor listing of most of its property assets in 
Shenzhen at a 198 billion yuan valuation. It has now raised 70 
billion yuan from investors who will hold 26 percent of its 
Hengda Real Estate unit, which will be injected into the already 
listed Shenzhen Real Estate. 
    - By late morning in Hong Kong on June 12, Evergrande shares 
stood 0.6 percent higher at HK$16.74. 
    - For previous columns by the author, Reuters customers can 
click on  WEBB/   
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
Shenzhen Metro becomes China Vanke's largest shareholder after 
stake purchase      urn:newsml:reuters.com:*:nL3N1J423P 
Short-sold and $78 bln in debt, China's Evergrande hits record 
high     urn:newsml:reuters.com:*:nL3N1J318K 
Evergrande raises $5.8 bln ahead of backdoor listing of property 
unit     urn:newsml:reuters.com:*:nL3N1IY06T 
Evergrande statement    http://www.hkexnews.hk/listedco/listconews/SEHK/2017/0609/LTN20170609644.pdf 
BREAKINGVIEWS - Evergrande's buyback blitz raises new red flag   
  urn:newsml:reuters.com:*:nL4N1I01AS 
BREAKINGVIEWS - Evergrande's M&A misadventure is costly    
 urn:newsml:reuters.com:*:nL4N1EH1MI 
BREAKINGVIEWS - Evergrande harks back to the Eighties    
 urn:newsml:reuters.com:*:nL3N1AX1PR 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Editing by Pete Sweeney and Kathy Gao) 
 ((quentin.webb@thomsonreuters.com;)(Reuters 
Messaging:)(quentin.webb.thomsonreuters.com@reuters.net)) 
 
Keywords: VANKE M&A/SHENZHEN METRO BREAKINGVIEWS