Evergrande's 101% rally seen slowing after HK$3.2b buyback

[NEW YORK] Real estate mogul Hui Ka Yan's vast wealth has soared by US$13.2 billion since late March, thanks in part to a wave of stock buybacks that sparked a 101 per cent gain for his Chinese property firm. The billionaire is now running low on fuel to propel the shares higher.

Mr Hui's China Evergrande Group has bought back so many shares that it's bumping up against liquidity limits imposed by the Hong Kong Stock Exchange. The free float of shares trading at China's third-biggest developer sits at about 22.16 per cent, according to Bloomberg calculations, close to the minimum 22.04 per cent set by the bourse.

"Evergrande could be running out of ammunition," Bloomberg Intelligence property analysts Kristy Hung and Patrick Wong wrote in a note. "The constraints suggest their valuation boost could be fleeting."

Without the support of buybacks, Evergrande is more exposed to short sellers that have been circling the Shenzhen-based developer for years, betting that its massive debt load will eventually bring its shares back to earth.

As Evergrande trends closer to its liquidity limit, bearish bets have risen to 16 per cent of free float as of June 29, from a two-year low of 8.9 per cent on March 9, according to IHS Markit data.

In an emailed response, Evergrande said the share repurchases demonstrate the company's optimism over its business outlook, adding that the stock rally reflects solid results. The developer reported last week that year-to-date cash collection from property sales surged 53 per cent to 287 billion yuan (S$56.59 billion) from a year earlier.

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FAILED SHORTS

So far, bets on an Evergrande plunge have rarely paid off, in part because of the aggressive buybacks and the limited number of shares available to borrow in order to execute the short trades. The stock has risen more than five fold since 2015, including dividends.

When it comes to buybacks, no one does it better, or at least as often, as Evergrande.

At a time when most companies around the world have halted buybacks to preserve cash for the pandemic, Evergrande has bought shares in 29 of the last 41 trading days, at a cost of HK$3.2 billion (US$575.3 million). Repurchases accounted for as much as 54 per cent of single-day trading volume and a quarter of turnover since the start of the latest round on May 4, data compiled by Bloomberg shows.

In contrast to most listed companies that tend to minimise repurchase costs and halt them when share prices stabilise, Evergrande usually buys as many shares as approved by the board, often at the upper price limit set.

LUCRATIVE RALLY

For shareholders like Mr Hui, who controls almost 77 per cent of the firm, the purchases have paid off handsomely on paper. The stock has doubled from a March 23 trough, compared with a 13 per cent gain for Hong Kong's benchmark index. The rally has lifted Evergrande's market capitalisation to HKUS$261 billion, valuing Mr Hui's stake at HK$203 billion. Mr Hui is the fourth-richest man in China, with assets of about US$29.2 billion, according to the Bloomberg Billionaires Index.

"Few companies would buy back shares to such a scale as Evergrande," said Nigel Stevenson, a Hong Kong-based analyst at GMT Research, a firm that counts short sellers among its clients. "They appear to not be price sensitive with buybacks at all."

QUOTA TO DEPLETE

After cancelling 188 million shares since May, Evergrande's buyback strategy may soon be hitting a wall in Hong Kong, which requires all companies to maintain enough free float to ensure liquidity. Failure to maintain the minimum can lead to a trading halt and potentially a delisting if the breach persists, according to exchange rules.

Nomura Holdings estimated Evergrande's remaining quota for buybacks was 20 million shares as of June 23. That's equal to about three trading days, based on the 6.5 million average share purchase in this round of buybacks, according to Bloomberg calculations. Evergrande's last buyback was on June 19.

While the buyback investment is equal to just 1.3 per cent of Evergrande's 229 billion yuan in cash, some market watchers have raised concerns given the company's liquidity. Cash holdings cover just 61 per cent of short-term borrowings due within a year, the lowest in at least five years, Bloomberg calculations show.

"The signal of buyback itself is credit negative, no matter how much money it costs," said Zhou Chuanyi, a credit analyst at Lucror Analytics Pte in Singapore.

Moody's Investors Service changed its credit outlook on Evergrande to negative from stable on June 23, citing concerns that current cash and cash flow from operations are insufficient to cover debt obligations over the next 12 to 18 months. S&P Global Ratings and Fitch Ratings may follow suit, according to Bloomberg Intelligence.

Another critical test looms on Jan 31, when 27 strategic investors are allowed to exit unless Evergrande gets its long-delayed listing on the Shenzhen stock exchange. If they refuse to extend the deadline, the company would face a repayment burden of as much as 130 billion yuan.

"These investors have a good relationship with Evergrande, and in normal years they would agree to extend," said Lucror's Mr Zhou. "But now the coronavirus may challenge their own financial standing, and things become more uncertain."

BEARS RISE

Still, even in the face of all this, short sellers may be disappointed. Evergrande is backed by several other tycoons who have supported Mr Hui in the past. Minority shareholders include the wife of billionaire mogul Joseph Lau, a close ally, who owns 8.9 per cent through Chinese Estates Holdings Ltd.

"Right now there aren't many shares out there to be traded," said Phillip Zhong, a senior equity analyst at Morningstar Investment Management Asia. "If short sellers want to short, Evergrande's friendly entities may be able to absorb those."

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