In 1986 Yeung Kwok-keung ran a construction firm in Shunde in Guangdong province. For some time, its commercial prospects were overshadowed by fears that Shunde’s developers would go under and fail to pay him. The nightmare came true in 1993 but Yeung bit the bullet, taking over a large residential site and selling the homes that he had built.
An unintentional developer, perhaps. But his company thus took the first steps to becoming today’s Country Garden, one of China’s best known property brands.
Also in May 1986, Cathay Pacific listed on the Hong Kong stock exchange. A month later the airline landed in the territory’s benchmark Hang Seng Index (HSI) as one of the big-hitters in the local economy. But the airline’s blue-chip status came to an end this month, when it was replaced in the HSI by Country Garden.
Cathay’s deselection says something about the declining fortunes of one of Hong Kong’s best-known brands.
But the bigger question about the reshuffle was why the newcomer wasn’t China Evergrande. If the index compilers were ready to add another Chinese property counter to the mix (two state-controlled developers are already in the 50-member family), why didn’t Evergrande get the nod?
As of this week Country Garden had a market value of HK$268 billion ($34 billion), much smaller than Evergrande’s HK$383 billion (Cathay’s market cap is now less than HK$50 billion). However, as the Hong Kong Economic Times noted, a healthy public float is a key condition for inclusion in the index and this is an area where Evergrande falls short.
Yeung and his family control less than 60% of Country Garden. According to regulatory filings from June, Evergrande’s chairman Xu Jiayin owns nearly 78% of his company. Its public float has diminished further since then. Chinese Estates, a Hong Kong-listed firm controlled by one of Xu’s card-playing buddies (see WiC364), said last month it had amassed a 6% stake as well.
The shortage of publicly tradable stock – arguably less than 15% of the total – means Evergrande’s share price can be volatile. Indeed, it has spiked more than 500% since the beginning of 2017.
Hurun, which specialises in counting the pennies of Chinese tycoons, says the staggering rally has made Xu into China’s richest man with a net worth of $43 billion.
Xu has actually been at the top of the rich list before (in late 2009 following Evergrande’s listing in Hong Kong). He soon lost the crown when investors dumped Evergrande’s shares amid concerns over its mounting borrowings. Since then his company has survived debt scares to grow from a Guangzhou-based developer into an entertainment-to-healthcare conglomerate with core interests in property.
Xu is currently working on another public offering. This time round, he wants to float Hengda Real Estate, Evergrande’s property unit, on Shenzhen’s A-share market. Complicating matters, Xu has been striking a series of hefty pre-IPO deals. Last week, Evergrande raised Rmb60 billion ($9 billion) by selling a 14% stake in Hengda to a group of investors including the retailer Suning. The fundraising values Hengda at $64 billion, which is 30% higher than its Hong Kong-listed parent. He raised another Rmb70 billion in a pre-IPO deal a year ago, in a recapitalisation effort that helped bring down Evergrande’s gearing ratio (which the Financial Times put at a peak of 777% in June 2016).
The biggest risk factor now, Sohu Finance notes, is whether Chinese regulators will give the green light to Hengda’s A-share float in Shenzhen.
Guangzhou R&F, another real estate firm, has been queuing for an A-share listing for two years, but according to local media it has just had its application rejected by the China Securities Regulatory Commission. If Hengda runs into similar trouble, Evergrande’s share price in Hong Kong will likely plunge.
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