China Evergrande asset disposals lift bonds but shareholders wince

Shares have almost halved from recent highs while bonds now trade above par

China Evergrande asset disposals lift bonds, but shareholders wince
China Evergrande chairman Hui Ka Yan.

(ATF) China Evergrande Group’s scramble for cash via asset sales and hefty sales discounts is music to the ears of bondholders but shareholders are grimacing from the pain inflicted on its stock.

Since the country’s second-biggest property developer sold a stake in its property management unit for HK$23.5 billion, reducing its stake in the arm, the company’s bonds and shares have headed in opposite directions.

Shares have near-halved from the year’s highs while its bonds have bounced to trade above par. For example, its 8.75% bonds due 2025 have rallied to 102 cents on the dollar from life lows of 81 cents struck earlier this year.

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“Evergrande is in a difficult situation,” Andrew Collier told Asia Times Financial Television.  

“It has a lot of its land bank in smaller tier-three cities that are weaker financially right now and it has been hit hard by the Covid pandemic. It has also been hit by rising land prices that have squeezed the margins. 

“It could be the government is squeezing them and that it will have to raise a ton of cash by selling assets which will depress prices.”

Collier said that banks would continue to give loans provided they reduce debt drastically, which means “essentially getting rid of a lot of assets and cutting margins. Investors are not going to be happy with that so the stock price of the companies may not do well going forward”.

Credit positive

The credit market is pleased with these developments, however.

Moody’s Investors Service said the sale of equity stake in the property management arm is credit positive but added that more needed to be done before Evergrande's outlook could return to stable from negative. It said the company would have to demonstrate discipline in its business growth and acquisitions.

Evergrande has 817 projects across 229 cities in China, one of the broadest geographic coverages among China’s developers. But the property behemoth has plans to reduce its land bank by 30 million sqm each year by 2022 even as it struggles to improve its credit metrics as a result of its trillion-plus yuan debt – which has trebled in the past five years.

The “asset sale is credit positive in the near term as it raises cash, which we hope will be used to pay off the debt”, said Warut Promboon, a credit analyst at Bondcritic, an independent credit research house. “The key is whether the company was forced to sell its assets at a deep discount, which could hurt the overall enterprise value and its potential growth in the long run.”

Discounted sales

Evergrande has also raised cash by selling houses at discounts of as much as 30%, which resulted in a 24.3% year-on-year increase in November contracted sales. Accumulating the first 11 months, Evergrande recorded 678.7 billion yuan in sales and has outperformed its full-year contracted sales target of 650 billion yuan.

“That is not a good sign,” said Warut. “When management has to admit their assets are overvalued, it tells equity investors to discount the shares accordingly if the shares have not already been discounted. However, for the bondholders, the news is clearly spread positive in the near term on potential debt reduction.”

S&P Global expects the company to achieve 25% growth in contracted sales to about 760 billion yuan this year, supported not only by promotions, but also various sales tactics such as an attractive referral system.

It also estimates a cash collection rate of about 85%-90% backing its liquidity, supported by better mortgage availability and incentives to replace instalment payment schemes, which lengthened its cash collection in prior years.

“In our view, Evergrande, as an asset-rich company, has a strong capability to raise funds via asset disposals, public listings, and substantial capital market issuances,” said Matthew Chow and Christopher Yip. “The proposed dual-listing of China Evergrande New Energy Vehicle Group(Evergrande Vehicle) on Shanghai's Science and Technology Innovation Board, if completed, will also boost its liquidity.”