Chinese Estates Buys $1B Stake in Mainland Development Giant Evergrande

Hong Kong developer Chinese Estates Holdings has deepened its longstanding ties with China Evergrande, revealing it has acquired a five percent stake in the mainland’s largest homebuilder since April for a total price of HK$8.1 billion ($1.04 billion).

The news is expected to bolster investor confidence in Evergrande, until recently China’s most indebted developer, as the Guangzhou-company strives to improve its balance sheet ahead of a backdoor mainland listing.

Evergrande Gets a Lift From Hong Kong Builder

“The Board is optimistic about China Evergrande’s overall prospect,” Chinese Estates commented in a filing announcing the share acquisition on Wednesday. Through its subsidiaries the company has purchased 655,208,000 shares of US$0.01 each issued by Hong Kong-listed Evergrande since April.

The investment makes Chinese Estates the second-largest shareholder in Evergrande, according to an analysis by Bloomberg. The developer controlled by high-profile billionaire Joseph Lau and his family has a history with Evergrande dating back to 2009, when Chinese Estates become a cornerstone investor in the mainland firm’s initial public offering in Hong Kong. The two companies have since linked up on billions of dollars worth of real estate deals.

Chinese Estates is paying a high price for its interest in Evergrande. The developer headed by Xu Jiayin is trading at around 4.2 times book value, up from 1.3 times at the end of last year, compared to an average ratio of 0.92 times for a sampling of 22 leading Chinese developers, according to Bloomberg. Evergrande’s contracted sales rose by 72 percent in the first half of 2017, making it the top mainland builder by sales.

The company issued a record-breaking $6.6 billion bond in late June, raising questions about the developer’s commitment to deleverage, which it announced in March. Nevertheless, Evergrande has repaid most of its outstanding high-interest perpetual bonds in recent months and has lost its title as the country’s most debt-burdened developer to Sunac China, which this week was reported to be targetted by banking regulators following its decision to purchase a $9.3 billion asset portfolio from Dalian Wanda.

CIMB Securities estimated last week that Evergrande’s net debt to equity ratio may have dropped to 200 percent from 432 percent last year.

Lau and Xu Extend their Cross-border Partnership

Lau and Xu are said to be personal friends, and the investment by Chinese Estates marks a deepening partnership between the two firms. In May of last year, a unit of Evergrande agreed to sell shares in Shengjin Bank, a mainland commercial lender, to Chinese Estates for HK$6.9 billion.

In November 2015, Evergrande set a new price record for a Hong Kong office building by buying the Mass Mutual Tower in Wanchai from Chinese Estates for HK$12.5 billion ($1.61 billion). That deal followed an October transaction in which Evergrande paid HK$7 billion ($903 million) to acquire a 205,000 square metre project in Chongqing from three Hong Kong developers, including Chinese Estates. Lau’s company received HK$1.75 billion in cash for its 25 percent stake in the project.

And in July of that year, Evergrande purchased three development projects in Chengdu from Chinese Estates subsidiary Evergo Holdings (China) for HK$6.5 billion ($839 million). The three transactions between the property companies in 2015 totalled $$20.75 billion ($2.68 billion).

Lau, who is suffering serious health problems, transferred his 75 percent stake in the company to his wife and son this past March.