(ATF) The Evergrande Property Services Group's Hong Kong IPO finally raised $1.8 billion and averted a serious real estate crisis in China’s fragile property markets that could have also led to social instability.
At stake of this cash-raising exercise were not only the jobs of its 3.31 million employees, but also the fortunes of 2.04 million owners who have purchased its 617,000 unfinished commercial houses that remain incomplete and not delivered for want of cash. This would have had seriously undermined social stability, say experts.
Yet, while the IPO would help improve cash flow for the debt-laden property developer, being priced at the lower end of expectations the tepid demand of its shares still underscores concerns about the financial health of the upstart parent.
The offering comes after a run of setbacks for China Evergrande Group, the country's second-biggest and most indebted property developer with some $124 billion in borrowings as of June.
These include a secondary share sale last month that raised only half its initial target and the dropping of a plan to inject most of its property assets into a Shenzhen company via a backdoor listing.
"Evergrande has too much debt...the listing of the property services unit is to save the parent; Evergrande will continue to sell shares (in the unit) after the listing to cut debt," said Francis Lun, chief executive of GEO Securities.
However, according to Reuters, Hong Kong's second-biggest IPO this year was priced at HK$8.80 per share, compared to the marketed expectations of HK$8.5 to $9.75 each.
Evergrande Property Services though, has not yet been made the information public and has declined to comment.
The IPO price represent a 5% increase from a $3 billion private funding round the company undertook in August when it issued shares at HK$8.375.
At HK$8.80 a share, Evergrande Property is valued at HK$95.06 billion ($12.3 billion). Half the funds raised will go to the company with the other half earmarked for the parent firm.
A greenshoe option also exists, which if exercised would take the size of the stake sold from 15% to 17%.
Evergrande has been scrambling for cash as Beijing tackles what it considers excessive borrowing in the real estate development sector with planned new debt-ratio caps.
But both credit and sell-side analysts have said they do not see imminent risks of default, noting Evergrande has various fund-raising options including domestic bond issuance and plans to list other units.
And while Evergrande was on the hook for as much as $19 billion to investors in the planned backdoor listing, it has managed to reach agreements with most investors who will instead keep the equity in property assets rather than demand repayment.
Some analysts noted the cool reception to the IPO was also due to a slew of property services-related listings in Hong Kong and the sense that the sector was overvalued.
Three of Evergrande Property's rivals including Shimao Services Holdings Ltd recently priced towards the middle or upper end of ranges flagged during their bookbuilds.
"So Evergrande has to face reality and set a lower price in the hope of getting a higher trading price after IPO," said UOB Kay Hian director Steven Leung.
The IPO and a previous share sale by Evergrande will reduce its stake in Evergrande Property to around 59%. Evergrande Property is expected to list on Dec 2.
Meanwhile, China’s housing watchdog and central bank, PBoC has asked some of the biggest developers including Evergrande to report their financing, debt and business data on the 15th of every month.
With reporting by Reuters.