China Evergrande surges after selling 60b yuan stake in property unit

[SHANGHAI] China Evergrande Group, once the country's most-indebted developer, raised 60 billion yuan (S$12.3 billion) from selling a stake in a property unit to further cut leverage.

The firm's shares surged as much as 8.5 per cent in Hong Kong as the fundraising exceeded its previous guidance.

The sale will cut Evergrande's stake in Hengda Real Estate to 63.5 per cent from 73.9 per cent, the company said in a Hong Kong stock exchange filing on Monday. This is the third time Evergrande has reduced holdings in the unit, having previously sold 70 billion yuan of its shares.

Evergrande shares have risen more than 500 per cent this year, the top performer on the Hang Seng Composite Index, partly thanks to its efforts to reduce debt. Other factors include the prospect of a higher valuation through a backdoor listing of Hengda's assets in China, share buybacks to fight off short-sellers, and signs of industry consolidation.

The fundraising amount exceeded August guidance of 30 to 50 billion yuan. Evergrande's leverage will decline to 151 per cent after the sale from 240 per cent in the first half, Morgan Stanley analysts led by John Lam wrote in a note on Tuesday.

The six investors in the latest round of fundraising include Shandong Highway Investment and Suning Electrical Appliances. Evergrande also raised its profit forecasts for Hengda for the three financial years through 2020.

The latest sale implies a pre-fundraising valuation for the unit of 365 billion yuan, higher than the 268 billion yuan indicated when strategic investors bought stakes in June, Nomura Holdings Inc analysts led by Elly Chen wrote. Nomura on Tuesday raised its price target for Evergrande to HK$32.6.

In Monday's filing, changed wording for a previously articulated investor guarantee indicated that Evergrande has given itself a longer timeframe to complete Hengda's backdoor listing.

Previous statements had said that Evergrande or its chairman Hui Ka Yan are obliged to fully repurchase any investors' stakes in Hengda if the listing isn't completed by January 2020. That date was changed to January 2021 in the latest filing.

An extraordinary general meeting will be held Nov 23 for shareholders to approve the stake sale, the exchange filing shows.

BLOOMBERG