China Evergrande Group’s second-largest shareholder Chinese Estates Holdings has dumped a major chunk of Evergrande shares at a loss and signalled the potential sale of its entire stake, as the staunchest ally that kept the world’s most indebted property developer afloat heads for the exit amid a debt crackdown.
Chinese Estates posted a loss of HK$1.38 billion (US$177.2 million) after selling 108.9 million Evergrande shares in the open market for HK$246.5 million, or HK$2.26 each on average from August 30 to September 21, according to a stock exchange filing. Evergrande’s shares changed hands at HK$3.42 on average during that period, according to Bloomberg's data.
The sole cornerstone investor in Evergrande’s November 2009 initial public offering (IPO), Chinese Estates held 751.09 million Evergrande shares, or 5.66 per cent of the Shenzhen-based developer, as of August 31, a stake which may be sold through block trades, or in one, or a series of transactions “depending on the prevailing market conditions,” according to its filing.
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The disposal and possible exit by Chinese Estates, founded by the Hong Kong magnate Joseph Lau Luen-hung, is a significant bookmark in its ties with Evergrande’s chairman Hui Ka-yan, a relationship that spanned more than a decade. Chinese Estates has been either a buyer, or the seller, of every significant financial transaction by Evergrande since it went public 12 years ago.
Chinese Estate bought US$50 million of Evergrande’s shares when Hui took the developer public in 2009, acting as the sole cornerstone investor in the offering.
Chinese Estates, then under the chairmanship of Lau’s son Lau Ming-wai, paid HK$13.59 billion to top up its Evergrande stakes in 2017 and 2018, picking up a total of 860 million Evergrande shares at an average price of HK$15.80 each, according to the filings. The average disposal price in August and this month was an 86 per cent discount to its average purchase price.
Lau and his wife Chan Hoi-wan are the highest-profile investors to be heading for the exit, as Evergrande grapples with finding cash to settle US$300 billion in liabilities. The company partially averted a default when it negotiated an “off-exchange” arrangement with bondholders to settle an interest payment on 4 billion yuan (US$619 million) of onshore bonds, estimated at 232 million yuan. The company has another US$83.5 million in interest payment due today in a dollar-denominated note.
Chinese Estates, which owns several hotels, commercial property and residential complexes, has been relying on its portfolio investments for income, as real estate sales dwindled, receiving HK$156.5 million in first-half dividends from Evergrande.
The loss from its Evergrande disposal will tally up to a HK$10.86 billion loss in the year ending December 31, the company said.
The divestment of Evergrande shares was done due to “caution and concern about liquidity,” in case “the remedial measures said to have been taken and to be taken by Evergrande could not be effectively implemented,” Chinese Estates said.
Evergrande’s shares jumped 17.6 per cent to HK$2.67, after soaring by as much as 32.2 per cent in intraday trading, on the prospect that the developer may negotiate its way out of a default. Chinese Estates rose 5.5 per cent to HK$2.30 following an intraday jump of 15.1 per cent.
The Chinese government, anxious to prevent Envergrande’s collapse from saddling Chinese homebuyers with unfinished property, may step in to restructure and nationalise the developer, asiaMarkets.com reported, citing unidentified sources close to the Chinese government.
“The news, if true, is very positive as it suggests that central government is aware of the high potential risk related to Evergrande’s bankruptcy and it needs to take immediate measures to contain all these risks,” said Raymond Cheng, head of research of Hong Kong and China at CGS-CIMB Securities. “Dragged [down] by Evergrande in the past few months, the share prices of China’s property and property management [stocks] were hit markedly. We expect the share prices in both sectors to see strong rebound in the near term.”