Once China’s top-selling property group, Evergrande is facing what could be one of the country’s largest-ever restructurings as the company is weighed down by debts of around $305 billion. Uncertainty over Evergrande’s fate has unsettled financial markets worried about any fallout from its troubles.
Evergrande on Monday said it requested a halt in the trading of its shares in Hong Kong pending an announcement about a major transaction. Evergrande Property Services Group, a spin-off listed last year, also requested a halt and said it referred to “a possible general offer for shares of the company.”
China’s state-backed Global Times said Hopson Development was the buyer of a 51% stake in the property business for more than HK$40 billion ($5.1 billion), citing unspecified other media reports. Hopson also said it had suspended trading in its shares, pending an announcement related to a major acquisition of a Hong Kong-listed firm and a possible mandatory offer.
Both Hopson and Evergrande did not respond to requests for comment on the Global Times report.
Analysts said the possible deal signals the company is still working to meet its obligations. But it also rekindled broader concerns about the risk to China’s property sector and economy if Evergrande is liquidated at low prices.
“Selling an asset means they are still trying to raise cash to pay the bills,” said OCBC analyst Ezien Hoo. “Looks like the property management unit is the easiest to dispose in the grand scheme of things.”
In August, Reuters had reported that Evergrande was in talks with state-owned and private companies to sell stakes in its electric vehicle and property management businesses, citing a source close to the matter.
Beijing has also prodded government-owned firms and state-backed developers to purchase some of Evergrande’s assets, people with knowledge of the matter told Reuters last week.
Hopson stands in good stead compared with other property developers in China, owning more assets than liabilities and improving profit in the first half.
Shares in Hopson, which has a market value of HK$60.4 billion ($7.8 billion), have jumped 40% so far this year and it was rated B+ by Fitch in June.
Evergrande’s property services business, which says it managed a total contracted floor area of 810 million square metres at the end of June, was also profitable in the first half of 2021, based on its financial statements.
If the deal goes ahead at the price reported by the Global Times, it represents a roughly 17.5% discount to the Services’ Group’s December 2020 listing valuation.
With liabilities equal to 2% of China’s gross domestic product, Evergrande has sparked concerns its troubles could spread through the global financial system.
Nervousness has eased after China’s central bank vowed to protect homebuyers’ interests, but ramifications for China’s economy has kept investors on edge.
Monday’s share trading suspension knocked the offshore yuan, which fell about 0.3% against the dollar, and weighed on the Hang Seng benchmark index.
The possible deal activity lifted shares in Evergrande’s electric vehicle unit by 29% but cast a pall over regional stocks and global markets. [MKTS/GLOB]
“It is definitely a positive move towards solving Evergrande’s liquidity crisis and we expect more to come,” said Gary Ng, senior economist Asia Pacific at Natixis.
“However, having said that, offloading some assets may not be totally sufficient, the key for Evergrande is to get project construction going and to sell inventory.”
Shares in Evergrande have plunged 80% so far this year, while its bonds have held steady at distressed levels.
The group said last month it had negotiated a settlement with some domestic bondholders and made a repayment on some wealth management products, largely held by Chinese retail investors.
Holders of the company’s $20 billion in offshore debt appear further back in the creditor queue and bondholders have said interest payments due in the past few weeks have failed to arrive.
Evergrande faces deadlines on dollar bond coupon payments totalling $162.38 million in October.