Evergrande Real Estate, one of China’s largest developers – and its most indebted – shocked the market today by announcing that it was acquiring seven mainland projects from Hong Kong’s New World Group for a total of RMB 20.4 billion ($3.15 billion).
The projects Evergrande is buying from New World are sprinkled across the country, and include a development in Qingdao, Shandong province, two pieces of land in Shanghai’s Qingpu district, and a project in Beijing, plus one each in Chengdu and Guiyang, Guizhou province.
This is the second time this year that the mainland developer controlled by flamboyant billionaire Xu Jiayin (also known by his Cantonese name Hui Ka-yan) has acquired projects from New World, bringing total acquisitions from the Hong Kong company up to $5.3 billion.
This latest batch of deals was announced on the same day that Evergrande closed on its sale of $1.5 billion in perpetual securities to New World and its affiliates.
New Set of Deals for Old Partners
Today’s acquisition is just the latest deal in a long relationship between New World and Evergrande, as well as between the chairmen of the two companies, Xu and Hong Kong billionaire Cheng Yu-tung, whose family controls both New World and Hong Kong-listed conglomerate Chow Tai Fook.
In 2008, one year before Evergrande was listed on the Hong Kong Exchange, a holding company belonging to Cheng, who is currently listed by Forbes as Hong Kong’s third-richest person with a fortune of $13.6 billion, took a $506 million stake in Evergrande.
And just a few weeks ago, New World sold four residential projects in second-tier mainland cities to Evergrande for a combined RMB 13.5 billion ($2.1 billion). When Evergrande picked up those sites in Haikou, Huiyang (near Shenzhen) and Wuhan, the market drove its stock down by 7 percent that day. However, the news of today’s acquisitions (which included sites in the first tier cities of Shanghai and Beijing) brought Evergrande’s stock up by 4.4 percent.
In Evergrande’s fundraising drive this week, a subsidiary of New World China Land Ltd agreed to buy $900 million worth of Evergrande’s perpetual securities, and a subsidary of Chow Tai Fook Enterprises Ltd, bought up the other $600 million. The announcement regarding the securities sales made no mention of the sale of projects or other assets by New World to Evergrande.
Evergrande has been widely criticised by industry analysts for classifying its perpetual securities as equity on it balance sheet, while many believe the instruments need to be treated as debt.
Evergrande Buying Spree Continues
While Evergrande’s $5.3 billion of acquisitions from Cheng’s companies makes New World the mainland developer’s favorite dance partner this year, the New World deals make up just a portion of Evergrande’s 2015 buying binge.
Companies belonging to fugitive developer Joseph Lau sold a total of $2.66 billion in real estate assets to Evergrande this year, including buying a Hong Kong office tower for $1.61 billion in November, as well as projects in Chengdu and Chongqing earlier in the year.
Also in November, Evergrande acquired a 50 percent stake in a loss-making Chongqing-based life insurer for RMB 3.9 billion ($617 million).
Xu Bets Big and Makes Powerful Friends
One common thread that seems to run through Xu’s recent string of deals is the outsized personalities involved on both sides.
Xu has become a public figure in China with his drive to make his soccer club, Guangzhou Evergrande a world competitor, and has made a major production out of announcing new subsidiaries in bottled water, plastic surgery and other consumer related areas.
Cheng, whose family controls Hong Kong’s biggest chain of jewelry shops, Chow Tai Fook, as well as the New World Hotel chain, is less flamboyant than Xu but still very much a personality in Hong Kong business.
Lau of Chinese Estates, is even more high profile than Xu, buying his daughter a $48 million diamond, and flying around in his very own Boeing 787. (Xu has to make do with his customised Airbus 320).
Of course, Xu is said to have his own high profile friends on the mainland. A book about Wen Jiabao reportedly has indicated that Wen Jiahong – the younger brother of the former Premier, had purchased 16 percent of Evergrande in 2001 for RMB 37.5 million. The book’s author, Yu Jie, went so far as to tell Germany’s Der Spiegel in 2012 that “Wen Jiahong is the real boss of Evergrande.”
But whoever Evergrande’s boss may be, he has just made some big new bets on China’s real estate markets and tied himself very closely to one of Hong Kong’s wealthiest families.