Evergrande Property Services fades on debut amid concerns over debt

Hong Kong initial public offering by spinoff from China Evergrande Group received a lukewarm response from investors worried over parent's accumulated $120 billion in debt 

Evergrande Property Services fades on debut amid concerns over debt
A prospective customer looks at a model of a new apartment complex at an Evergrande showroom in Wuhan, Hubei province. China Evergrande Group is China’s second-largest developer by sales. File photo by Reuters. 

(ATF) Shares of Evergrande Property Services fell on their Hong Kong debut on Wednesday, as concerns over its parent company's massive debts rattled investors.

The stock opened at HK$8.84 per share, a 0.45% premium to the HK$8.80 initial public offer price, but slipped to HK$8.65 before closing 0.2% down at HK$8.78.

Although the listing was the third-largest in Hong Kong in 2020, worries have mounted about the financial health of its parent, Hong Kong-listed China Evergrande Group, and the newly listed company’s dependence on China’s second-largest developer by sales. Shares of China Evergrande fell 2% in otherwise flat trading in Hong Kong.

Evergrande Property Services had said 65% of proceeds from the IPO would be used for strategic acquisitions and investments, 15% to develop its value-added services, and 20% to upgrade its information system, recruit talent, and for working-capital purposes.

In a recent report, rating agency Moody's cited concerns over the parent company's "ability to materially reduce its high level of short-term debt, high debt leverage and still high proportion of trust loans".

The developer owed about $121 billion at June 30.

Moody’s also faulted Evergrande's "weak liquidity and weakened profit margin".

Lukewarm response

Cynthia Chan, an analyst at Daiwa Capital Markets in Hong Kong, noted that while Evergrande Property Services is a "large-scale and fast-growing property management service provider", it is highly dependent on its parent for clients.

As at end-June 2020, Chan noted, it had contracted gross floor area of 513.3 million square metres. Its GFA under management totalled 254 million square metres, of which 99.6% is through China Evergrande.

Investors could manage only a lukewarm response to the Evergrande Property Services IPO. The stock was priced at the low end of the HK$8.50 to HK$9.75 per share range.

It also faces competition worries, with 16 property services companies launching IPOs in China and Hong Kong markets this year. China Resources Mixc Lifestyle, a unit of a state-owned conglomerate, on Tuesday priced its Hong Kong IPO at the top of its indicative range, making it likely to raise nearly $1.6 billion.

China's property companies are coming under increasing regulatory scrutiny. The People's Bank of China has asked some of the biggest developers, including Evergrande, to report their financing, debt and business data on the 15th of every month.

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