Evergrande unit gains most in two weeks after buying rival

Hong Kong

CHINA Evergrande Group's property services unit surged to a record after buying a rival firm as part of its push to become the country's largest property manager.

Evergrande Property Services Group Ltd surged as much as 13.5 per cent in Hong Kong trading on Monday after it agreed to buy Ningbo Yatai Hotel Property Services Co for 1.5 billion yuan (S$310 million). The stock has more than doubled since its November IPO, touching a high of HK$19.50 in morning trade, before paring gains to recently touch HK$17.52.

The acquisition will help Evergrande Services meet its ambition of increasing profit by 50 per cent this year and becoming the country's largest property manager. The deal is the firm's first since it raised US$1.84 billion in the initial public offering. At the time, the company said the majority of the proceeds would be used for acquisitions.

Income from the service provider may work as a reliable source of cash for debt-saddled China Evergrande, Bloomberg Intelligence analysts Michael Tam and Patrick Wong wrote in a note. With a US$120 billion debt pile as at June, Evergrande is still under pressure to lower leverage under new requirements imposed by China's regulator known as the "three red lines". In December, the developer received about US$920 million from offering its holdings of the services unit.

While many property services companies benefit from new projects by their parent developers for expansion, Evergrande's services arm needs mergers and acquisitions to sustain growth, UBS Group AG analysts led by John Lam wrote in a January report. Evergrande might need to sell some property projects due to tight liquidity and a down-cycle in the market, which could weaken growth at its management affiliate, according to the report.

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Last month, Evergrande Property Services said it planned to expand the area under management by 30 million square metres each month this year, people familiar with the matter said. The acquired firm would increase its business scale by at least 80 million sq m, according to a filing.

After the acquisition, the company's area under management will be more than 380 million sq m, the filing said. The purchase will add 940 projects serving two million homeowners to its portfolio, the company said in a statement on Friday. Ningbo Yatai also manages office buildings and industrial parks. BLOOMBERG