19 October 2018
Evergrande Group founder Xu Jianyin (R) needs to marshal support from China’s securities regulator if he is to succeed in a backdoor listing plan for some assets. Photo: China News
Evergrande Group founder Xu Jianyin (R) needs to marshal support from China’s securities regulator if he is to succeed in a backdoor listing plan for some assets. Photo: China News

Evergrande’s backdoor listing plan: Smart but not easy

Billionaire Cheng Yu-tung, the founder of New World Development, passed away last week at the age of 91. Known as a shrewd and gutsy entrepreneur, Cheng’s style seems to have rubbed off quite a bit on some of his friends — a poker game buddy, Xu Jianyin, in particular.

Xu, the founder of mainland property developer China Evergrande Group (03333.HK) announced this week a plan to inject some property assets into Shenzhen Special Economic Zone Real Estate & Properties Group Co. (000029.CN) in an apparent backdoor listing attempt.

By injecting Evergrande’s subsidiary Kailong Real Estate into the Shenzhen-listed firm, Evergrande will indirectly become the controlling shareholder of the Shenzhen firm.

The move came as Hong Kong-listed mainland property developers have been suffering from low valuations for years. In particular, institutional investors tend to shun Evergrande for its high leverage business model.

With net assets worth 182 billion yuan as of end-June, Evergrande’s current market value stands at only 66.6 billion yuan.

Simply speaking, through the backdoor listing plan, Evergrande hopes to gain much higher valuation in the mainland stock market and boost the value of its currently under-appreciated property assets.

If the deal is pulled off, Shenzhen Special Economic Zone Real Estate’s market capitalization is likely to reach 200 billion yuan, tripling its current market value, according to Credit Suisse.

Evergrande could also take the opportunity to introduce strategic investors by issuing fresh A shares, raising additional capital to lower its widely-criticized high gearing ratio.

On top of getting approval from shareholders, Evergrande needs the green light from regulatory bodies in Hong Kong and China.

Among these, blessing from the China Securities Regularity Commission (CSRC) is considered to be the most difficult to come by as Evergrande’s plan runs against a number of policy headwinds.

First of all, a renewed surge in home prices has prompted more than a dozen local governments in China to tighten their property rules. The last thing that authorities want to see is a property giant coming under the media glare and raising more money in order to snap up more pricey land plots.

One should bear in mind that not a single property company succeeded in getting listed through IPO on the mainland since 2012, although some have waited for years.

Since last year, due to a valuation premium in China market over offshore markets, numerous companies delisted from Hong Kong or the US and went back to China through backdoor listings. Such moves cost China foreign exchange, put downward pressure on the Chinese currency and increase supply of A shares, all seen as undesirable by the government.

CSRC has tightened the screws since July, and getting permission now seems rather difficult.

Xu does have a lot of guts to launch the plan amid all policy hurdles, but the question now is this: will he play his cards right and be resourceful enough to get the mission impossible done?

This article appeared in the Hong Kong Economic Journal on Oct. 5

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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