China’s third-largest property developer by sales, Hong Kong-listed China Evergrande, has raised $9bn by selling a stake in its mainland China property arm, Hengda Real Estate, to a consortium of Chinese investors. Hengda holds most of Evergrande’s mainland property assets, and this is the third share sale this year, raising a total of Rmb130bn ($20bn) in total, and leaves Evergrande with a 63.5% stake in Hengda. The latest sale values Hengda at Rmb425bn ($64bn), a 35% premium to Evergrande’s HK share price, and the group is working on a listing of Hengda on the mainland Shenzhen stock exchange, where property shares trade at a sharp premium to their counterparts in Hong Kong.
It’s All About the Debt
Evergrande was China’s largest property company in 2016, but also its most indebted, with a net debt to equity ratio at an eye-watering 600% in June 2016. But the Chinese government has been very vocal about the macro-financial risk from highly leveraged property companies, and Evergrand has been cutting debt, buying back shares and planning the Shenzhen listing of Hengda. The market has rewarded this strategy with a 480% rise in Evergrande’s share price, and the company said that this latest share sale would allow it to reduce its net gearing by a further 40% from the much improved 240% at its June 2017 interim results.
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