China Evergrande’s property management arm launching US$2 billion IPO as developer seeks to pare massive debt

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Evergrande Property Services’ executive directors Wang Zhen (left), Hu Liang (centre) and An Lihong at a press conference to announce the launch of the company’s IPO. Photo: Handout

Evergrande Property Services, a unit of mainland China’s largest and most indebted developer China Evergrande Group, is looking to raise up to HK$15.8 billion (US$2.04 billion) from an initial public offering in Hong Kong next week, a move that will allow its parent to pare back its massive debt.

The mainland property management services provider is offering 1.62 billion shares at an indicative price range of HK$8.5 and HK$9.75, equally splitting them between existing and newly issued shares, it said in an online media briefing on Sunday.

If the offer is priced at the top end and the overallotment option, known as greenshoe, is exercised, the company could raise as much as HK$18.17 billion.

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The company is offering 10 per cent of its global shares sale to retail investors in Hong Kong and 90 per cent through international placements from Monday until noon on Thursday when the offer is expected to be priced. The stock is set to start trading on the Hong Kong stock exchange on December 2.

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Chinese billionaire businessman and chairman of Evergrande Hui Ka Yan is listing a property management company to raise up US$2 billion. Photo: AFP

The IPO, together with the sale of a 28 per cent stake in the property management company to 14 investors in August, could raise almost HK$40 billion for China Evergrande, marking the latest fundraising for the indebted developer chaired by Hui Ka Yan. It comes on the back of a 30 per cent reduction in property prices in September and disposal of a 41 per cent stake in Xinjiang Guanghui Industry Investment Group, an energy-to-property conglomerate based in north-western China, for 14.9 billion yuan to Shanghai’s electricity generator Shenergy. Evergrande bought the stake in 2018 for 14.5 billion yuan.

The developer sold about 582 billion yuan worth of properties up to October, achieving 91 per cent of its full-year sales target of 650 billion yuan.

Evergrande’s total debt stands at 835.5 billion yuan (US$122.4 billion), according to its interim report published in late September. The company had to repay strategic investors 130 billion yuan by the end of March if it failed to achieve a four-year-old reorganisation plan.

However, it has managed to avert that repayment by reaching an agreement with most investors. Under the plan, the investors have agreed to keep their combined 125.7 billion yuan as equity interests in its subsidiary Hengda Real Estate. For the remaining 4.3 billion yuan equity interests, the group has paid the principal in cash and made the repurchase, according to a stock exchange filing by Evergrande on Sunday night.

“Evergrande has spent a lot of effort to improve its cash position,” said Gordon Tsui, chairman of Hong Kong Securities Association. “The IPO, together with the agreement with strategic investors of Hengda Real Estate, will be positive to the future development of the company.”

Evergrande’s shares closed 0.4 per cent lower at HK$16.62 on Friday. It has fallen 30 per cent this year, compared with a 6 per cent decline in the Hang Seng Index.

Evergrande has already breached the Chinese central bank’s threshold for indebtedness, known as the “three red lines” in the industry, according to an analysis by Huachuang Securities. The framework caps debt-to-asset ratio for developers at 70 per cent after excluding advance receipts, net debt-to-equity at 100 per cent, and short-term borrowings at no more than cash reserves.

Failing to meet those “red lines” may result in them being cut off from access to new loans from banks, the state-owned Economic Information Daily reported in late August.

Even against such a backdrop, Evergrande Property Services has attracted HK$7.2 billion from 23 cornerstone investors, representing 48.7 per cent of the offer. Artificial intelligence company SenseTime, a subsidiary of China Gas, as well as China Merchant Buyout Fund are among the cornerstone investors who are all optimistic and confident about the property management services company’s prospects and growth potential, according to people familiar with the offering.

“We have been contracted to serve 1,354 properties in over 280 mainland cities, which makes us a leader in the industry,” said Hu Liang, executive director and general manager of Evergrande Property Services told the media briefing. “We have a close cooperation with our parent Evergrande Group, which has provided a stable source of projects and business opportunities for us. The IPO funds will help us to conduct more M&A and new business development in the future.”

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