China Evergrande Group may have unveiled an ambitious plan to carry out a backdoor listing of its core property assets on the mainland Chinese stock market, but analysts said the move is likely to face major regulatory challenges.
The country’s second largest developer, listed in Hong Kong, said on Monday it will become the controlling shareholder of Shenzhen Special Economic Zone Real Estate Properties (Shenzhen Real Estate), after injecting its property unit into the state-owned developer in return for its shares in Shenzhen.Shares of Evergrande surged 8.2 per cent in Hong Kong on Tuesday, hitting a one-month high.
Although the stock reacted positively, analysts remain sceptical over whether the deal would be approved by regulators in Hong Kong and mainland China.
The Hong Kong stock exchange might not allow Evergrande to leave its holding company listed in Hong Kong without any substantial business, JPMorgan analysts led by Ryan Li said in a note.
“According to listing rules, an issuer shall carry out a sufficient level of operations,” wrote Li, who maintains an “underweight” rating on the company.
Despite the company having extended its business to various sectors in recent years, Evergrande’s property development sector still contributed more than 95 per cent of its 87.5 billion yuan of revenue in the first half of 2016.
Meanwhile, such a move also creates uncertainty at a time the China Securities Regulatory Commission (CSRC), the country’s securities watchdog, is giving closer scrutiny to backdoor listings to curb speculation and also trying to tighten liquidity for developers to subdue soaring land prices amid an overheated property market.
CSRC will “take a more cautious approach” on Evergrande’s case given its property asset base and potential large fund raising needs, said Toni Ho, a property analyst at RHB OSK Securities.
Guangdong-based Evergrande, owned by billionaire Hui Ka Yan, is one of the country’s most indebted real estate developers, with a net gearing ratio of about 430 per cent by the end of June.
Analysts said the deal looks positive even though they are waiting for more disclosure on details about the assets involved and debt assumed by the target asset and its valuation.
“We view the potential transaction as largely credit positive because it could improve the company’s equity base and capital structure, and diversify its funding channels,” global rating agency SP said on Thursday.
Evergrande and its property assets should be able to command “a higher valuation” in the mainland A-share market amid domestic investors’ focus on sales and brand name, Credit Suisse analysts wrote in a report.
Still, the benefits may not be realised immediately as the restructuring is subject to various approvals and expected to have a seven-month deal negotiation period.
Moreover, Evergrande’s status as a red-chip firm rather than an H-share company makes it a technically complicated process to transfer its offshore assets onshore.
H-share companies are traded in Hong Kong but incorporated in mainland China, while red chips, also traded in Hong Kong, are incorporated outside the mainland. Evergrande is registered in the Cayman Islands.
“We don’t see many successful stories for this type of transfer,” said Guotai Junan Securities’ property analyst Liu Feifan.
Wanda Group last month delisted its H-share Dalian Wanda Commercial Properties from the Hong Kong stock exchange to prepare for a listing on the mainland.
Ho said if Evergrande could complete the transaction, more developers may follow in order to seek higher valuations on the mainland.