Paying out

Evergrande dividend shocks analysts

Xu Jiayin w

Dividend delight: Xu Jiayin

For years soccer fans wondered why billionaire Xu Jiayin, the chairman of property developer Evergrande, was ready to spend millions of dollars luring foreign players to his football club Guangzhou Evergrande. In 2012, he even hired Marcello Lippi, a World Cup-winning coach from Italy. Critics stopped questioning the spending when Xu’s team beat FC Seoul last November to become the first Chinese team to win the AFC Champions League – the Asian equivalent of the European crown worn by the likes of Bayern Munich and Barcelona.

Xu had people scratching their heads again last week when he announced the most generous dividend payout ever for a Chinese property developer, reports Beijing Daily.

The Guangzhou-based developer announced that revenues for 2013 went up 44% from a year ago to Rmb93.7 billion ($15.08 billion), and that net profit rose by 49.3% to Rmb13.7 billion. Because “the company is [financially] resourceful, and it makes retail investors happy”, he has also decided to pay out a generous dividend of Rmb0.43 per share. That’s a dividend yield of 15%.

Some analysts are questioning the premise behind the payout. The Hong Kong Economic Journal was one of those to class it as “over the top”, noting that Xu, who has a 63% stake in the firm, took home nearly Rmb4.4 billion as a result.

Others wondered why Evergrande is being so generous when it could use more of the proceeds to pay down debt. Special dividend payments are for companies with lots of cash and nothing better to do with it, says the South China Morning Post. For Evergrande, that is not exactly the case.

The company’s debt ratio fell to 69.5% from 84% a year ago, according to CICC, although that ratio is well over 140% if perpetual capital securities are included. Evergrande also has a Rmb28 billion loan to repay by June. And if the company is so cash-rich, some investors are asking why it issued a $1.5 billion senior note carrying an interest rate of 8.75% last November.

“Unusual payouts [like Evergrande’s] are surprises that can be scary rather than pleasant,” the Hong Kong Economic Journal concluded. “Investors should calm down after the euphoria and carefully study this extraordinarily high dividend.”

Evergrande’s main focus is on property projects in lower-tier cities, which have seen some of the biggest declines in home prices. It has been trying to balance its portfolio by investing in more first and second tier locations, although the Economic Observer reckons that at least 70% of Evergrande’s revenues (and a similar proportion of its land bank) is away from leading cities.

One way to manage some of its risk might be to diversify further out of real estate. Early this year Evergrande announced that it has taken a stake in domestic lender Huaxia Bank for $528 million (the move is in line with a similar investment by property developer Vanke in Huishang Bank). But Xu’s other pet project is more left-field: a Rmb10 billion investment in Evergrande Spring, a mineral water brand that that sources its water from Changbaishan (which translates as “Ever White Mountain”) in northeast China. Evergrande says each 350ml bottle will be sold at an “affordable price” of Rmb3.80 and that there are synergies with its real estate business because it can set up water systems to deliver its own brand of water into its property projects.

At a recent press conference, Xu told reporters that this would help sales of Evergrande Spring reach Rmb10 billion by the end of this year and that they would more than triple in size again within two more years. That would correspond to about a third of current revenues in the property business, although sources at Evergrande have even suggested that sales from the water business might even surpass those from property at an unidentified point in the future.

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