Evergrande Asset Swap Opens Back Door to Mainland Listing

China Evergrande Real Estate appears to have grabbed an opportunity to enter the lucrative mainland share market through a backdoor listing on the Shenzhen stock exchange, following a series of announcements to the Hong Kong stock exchange this week.

The top three Chinese developer declared in a statement dated Monday, that two of its mainland-based subsidiaries had reached an agreement with Shenzhen Special Economic Zone Real Estate & Properties (Group) Co. Ltd to inject assets into the little-known Shenzhen-listed company, in return for it becoming a wholly owned subsidiary of the Evergrande group.

The agreement allows Evergrande, whose aggressive acquisition campaign has made it the most indebted Chinese developer, to gain access to a mainland stock market where valuations are several times what the company currently enjoys on the Hong Kong exchange. Evergrande’s backdoor listing follows less than one month after China’s largest commercial developer, Dalian Wanda Commercial Properties, delisted in Hong Kong with the goal of securing a listing on the Shanghai stock market.

Hoping For a Six-Times Higher Valuation

In a statement Evergrande said it, “believes that the Proposed Reorganisation will enable the market to assess the intrinsic value of the Company positively and reasonably, as well as providing an additional fund-raising platform for the Company and is beneficial to the Company.” Even following last year’s stock market slide shares on mainland markets routinely trade for more than three times the price to earnings ratios common on the Hong Kong exchange, and nearly six times the valuation of companies that make up the Hang Seng China Enterprises Index, which tracks the values of some of the biggest mainland companies listed in Hong Kong.

Evergrande’s shares had slid more than 20 percent this year as the Guangzhou-based developer built up debt obligations of RMB 381.3 billion ($57 billion) by the end of June. In the past few months the company’s stock price has gradually regained ground as analysts speculated that the developer controlled by flamboyant tycoon Xu Jiayin (also known by his Cantonese name, Hui Ka-yan) would follow Wanda’s trail back to the mainland’s frothier valuations.

Shares in Evergrande shot up 8.21 percent in value today after the company resumed trading following a temporary halt to announce the agreement with Shenzhen Special Economic Zone Real Estate & Properties.

As mainland investors are increasingly restricted from moving cash offshore, and with domestic stock shoppers more tolerant of financial contortions such as Evergrande’s passion for unconventional financial instruments, many mainland companies having been shifting their listings from markets in Hong Kong and the US, where investors have grown wary of Chinese investments.

Evergrande in particular has had a hard time flogging its stock in Hong Kong after it increased its debt load by more than 90 percent last year following massive acquisitions such as its record breaking purchase of the Mass Mutual Tower in Hong Kong’s Wanchai district from Joseph Lau’s Chinese Estates for HK$12.5 billion ($1.61 billion) in October last year. The developer, which was said to have a 6.2 percent chance of defaulting on its debt obligations in the next year, saw its profits drop 23 percent in the first half of 2016 as the costs of servicing its debt tripled.

Wanda and Evergrande Follow Different Paths to Same Destination

In switching its listing from Hong Kong to the mainland exchange, Wang Jianlin’s Dalian Wanda Commercial Properties projected that it could achieve a price to earnings ratio of 20 times, compared to the 9.3 times that it was achieving in Hong Kong, according to the company’s investment proposal.

Wanda’s last day of trading on the Hong Kong exchange was September 20^th, after the developer successfully bought back its shares just 15 months after the developer achieved Hong Kong’s biggest IPO of 2014, with a $3.7 billion public listing.

Wanda has yet to formally secure a listing on the Shanghai exchange, but Wang made detailed promises to investors in his privatisation scheme –- including a guaranteed minimum return of at least 12 percent for investors who buy shares in his mainland vehicle should it not be listed on a mainland bourse by September 2018.