Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In <a href="https://www.smartkarma.com/insights/evergrande-as-a-study-of-quantum-mechanics-theory" target="_blank" data-smartkarma-citation="insights:55979" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a> in August I discussed how the state of <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a>'s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/237/678/original/catinabox3.jpeg?1635296450" class="editor-image img-responsive" data-smartkarma-image-id="237678"></figure>With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.</section><h3>Evergrande Property Services Deal Broken - The Nuance</h3>Last week it became clear that <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> ("Evergrande") would end up NOT selling a controlling stake in <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> ("EPS") to <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> ("Hopson"), but that was less clear that it appeared. Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1020/2021102000957.pdf" target="_blank" rel="noopener">said</a> Hopson had not fulfilled its obligations (with word being - getting the Guangzhou govt stamp of approval). Hopson's "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1020/2021102000969.pdf" target="_blank" rel="noopener">clarification</a>" on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the "Cash and Short-Term Securities" at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. There is a HK$1bn break fee to the 'party which defaults' on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service - which are a crucial part of the value of the potential "estate" of Evergrande for the bondholders - may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. <h3>Coupons Paid and Unpaid - The Nuance</h3>The News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently - roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. But there is nuance here too. And timing. And that is better discussed in more detail below. <h3>The Discovery Phase of the Bezzle</h3>I used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith's fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up - The Bezzle - was now in its discovery phase, where "Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous."  I can cherry pick quotes, and if I do, I'd note that section continues a bit, then says, "Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed."I'd say we are definitely there now.It's a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve - which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.<div class="content-highlight">What matters now is that there is pressure on those who profited from The Bezzle to unwind the gains to whence they came.</div>What struck many observers for many years was how impervious to the enormous risks born by Evergrande's capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin <a href="https://www.caixinglobal.com/2021-08-30/rich-friends-who-helped-evergrande-tycoon-count-their-losses-101763855.html" target="_blank" rel="noopener">article</a> at the end of August which talked quite explicitly about Hui Ka Yan's poker buddies supporting him and his investments (the next day, one of his poker buddies - Joseph Lau and his wife, now head of <a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" data-smartkarma-citation="entities:20954:1" rel="noopener">Chinese Estates Holdings (127 HK)</a>, started selling shares), and <a href="https://www.caixinglobal.com/2021-09-22/caixin-explains-how-evergrandes-hui-ka-yan-blew-up-a-43-billion-fortune-101776376.html" target="_blank" rel="noopener">another article</a> perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  Hui Ka Yan - also known by Xu Jiayin - has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). A Reuters <a href="https://www.reuters.com/world/china/china-evergrande-shares-set-slide-105-after-26-bln-deal-collapses-2021-10-21/" target="_blank" rel="noopener">article</a> last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. <h2>The Newest News</h2>On Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to "optimise their foreign debt structures and proactively prepare for repayment of both principal and interest" <a href="https://www.reuters.com/article/china-evergrande-debt-ndrc/chinese-regulators-meet-companies-over-foreign-debt-holdings-idUSB9N2R702G" target="_blank" rel="noopener">according to Reuters</a>. On 26 October, Modern Land <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1026/2021102600163.pdf" target="_blank" rel="noopener">defaulted</a> on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1011/2021101100057.pdf" target="_blank" data-v-6b4d63ed="" rel="noopener">together offered to loan the company 800 million yuan</a> "within the next 2-3 months" on 11 October and a surprise given the NDRC meeting.And Bloomberg <a href="https://www.bloomberg.com/news/articles/2021-10-26/developer-s-payment-miss-signals-more-stress-evergrande-update" target="_blank" rel="noopener">reported</a> yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande's debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that "common prosperity" means rich people make sure those from whom they take money to become rich get what they are owed. There is nuance here too. And timing. More discussion of timing and nuance below the fold.

In Evergrande as a Study of Quantum Mechanics Theory in August I discussed how the state of Evergrande (3333 HK)'s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.Evergrande Property Services Deal Broken - The NuanceLast week it became clear that Evergrande (3333 HK) ("Evergrande") would end up NOT selling a controlling stake in Evergrande Property Services (6666 HK) ("EPS") to Hopson Development (754 HK) ("Hopson"), but that was less clear that it appeared. Evergrande said Hopson had not fulfilled its obligations (with word being - getting the Guangzhou govt stamp of approval). Hopson's "clarification" on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the "Cash and Short-Term Securities" at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. There is a HK$1bn break fee to the 'party which defaults' on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service - which are a crucial part of the value of the potential "estate" of Evergrande for the bondholders - may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. Coupons Paid and Unpaid - The NuanceThe News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently - roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. But there is nuance here too. And timing. And that is better discussed in more detail below. The Discovery Phase of the BezzleI used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith's fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up - The Bezzle - was now in its discovery phase, where "Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous."  I can cherry pick quotes, and if I do, I'd note that section continues a bit, then says, "Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed."I'd say we are definitely there now.It's a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve - which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.What matters now is that there is pressure on those who profited from The Bezzle to unwind the gains to whence they came.What struck many observers for many years was how impervious to the enormous risks born by Evergrande's capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin article at the end of August which talked quite explicitly about Hui Ka Yan's poker buddies supporting him and his investments (the next day, one of his poker buddies - Joseph Lau and his wife, now head of Chinese Estates Holdings (127 HK), started selling shares), and another article perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  Hui Ka Yan - also known by Xu Jiayin - has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). A Reuters article last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. The Newest NewsOn Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to "optimise their foreign debt structures and proactively prepare for repayment of both principal and interest" according to Reuters. On 26 October, Modern Land defaulted on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng together offered to loan the company 800 million yuan "within the next 2-3 months" on 11 October and a surprise given the NDRC meeting.And Bloomberg reported yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande's debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that "common prosperity" means rich people make sure those from whom they take money to become rich get what they are owed. There is nuance here too. And timing. More discussion of timing and nuance below the fold. 

Evergrande Bezzle Discovered - Quantum Kitty's Regenerative Capabilities Have Nuance and Timing

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Thematic (Sector/Industry)

Real Estate exposure is close to its lowest levels on record among active Asia Ex-Japan investors.  Average weights have fallen to 3.07% following an aggressive decline that took hold in April 2020 when average holding weights were above 5%.Real Estate is now the 3rd least widely held sector among active Asia Ex-Japan investors, slipping behind Health Care and Materials earlier this year for the first time in a decade.Underweights are widespread, led by the lightly held <a href="https://www.smartkarma.com/entities/ck-asset-holdings-ltd" target="_blank" data-smartkarma-citation="entities:22650:1" rel="noopener">CK Asset Holdings (1113 HK)</a>, <a href="https://www.smartkarma.com/entities/wharf-real-estate-investment" target="_blank" data-smartkarma-citation="entities:26031:1" rel="noopener">Wharf Real Estate Investment (1997 HK)</a> and <a href="https://www.smartkarma.com/entities/country-garden-holdings-co" target="_blank" data-smartkarma-citation="entities:5225:1" rel="noopener">Country Garden Holdings Co (2007 HK).</a>  <a href="https://www.smartkarma.com/entities/capitaland-investment-ltd-si" target="_blank" data-smartkarma-citation="entities:33774:1" rel="noopener">Capitaland Investment (CLI SP)</a>, a 0.1% weight in the MSCI AAXJ index is held by none of the active strategies in our analysis.Activity over the last 6-months shows a clear rotation out of China &amp; HK and Singapore Real Estate and in to India.  Indian Real Estate ownership metrics all moved higher, with average weights increasing by 0.17%, funds invested by +4.3%, more funds buying than selling and positive fund flows.Analysis taken from our Asia Ex-Japan research, covering 96 active strategies with combined AUM of $85bn

Real Estate exposure is close to its lowest levels on record among active Asia Ex-Japan investors.  Average weights have fallen to 3.07% following an aggressive decline that took hold in April 2020 when average holding weights were above 5%.Real Estate is now the 3rd least widely held sector among active Asia Ex-Japan investors, slipping behind Health Care and Materials earlier this year for the first time in a decade.Underweights are widespread, led by the lightly held CK Asset Holdings (1113 HK), Wharf Real Estate Investment (1997 HK) and Country Garden Holdings Co (2007 HK).  Capitaland Investment (CLI SP), a 0.1% weight in the MSCI AAXJ index is held by none of the active strategies in our analysis.Activity over the last 6-months shows a clear rotation out of China &amp; HK and Singapore Real Estate and in to India.  Indian Real Estate ownership metrics all moved higher, with average weights increasing by 0.17%, funds invested by +4.3%, more funds buying than selling and positive fund flows.Analysis taken from our Asia Ex-Japan research, covering 96 active strategies with combined AUM of $85bn

Asia Ex-Japan Real Estate:  Hitting the Lows.  China to India Rotation

Equity Research in HK and Mainland China

Li Tang

The NPCSC pushed forward with the property tax by granting the State Council authority to pilot it in certain regions for five years with the purpose to guide reasonable property consumption.
China has discussed the property tax plan and even launched pilot programs in Shanghai and Southwest China's Chongqing as early as 2011. The widening of the property pilot progamme would shake the real estates market,property-related industries, such as the steel and cement sectors. However,the tax may be neutral over the long-term for developers due to the expectation that the existing administrative controlling measures would be gradually removed after the implementation of the tax. Moreover, tax burdens would be moved from the construction stage to home transaction and holding phases, i.e. from developers to homeowners/ speculators.

The NPCSC pushed forward with the property tax by granting the State Council authority to pilot it in certain regions for five years with the purpose to guide reasonable property consumption.
China has discussed the property tax plan and even launched pilot programs in Shanghai and Southwest China's Chongqing as early as 2011. The widening of the property pilot progamme would shake the real estates market,property-related industries, such as the steel and cement sectors. However,the tax may be neutral over the long-term for developers due to the expectation that the existing administrative controlling measures would be gradually removed after the implementation of the tax. Moreover, tax burdens would be moved from the construction stage to home transaction and holding phases, i.e. from developers to homeowners/ speculators.

State Council to Pilot Property Tax in Certain Regions for Five Years

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Loan Defaults and USD Bond Payments Set To Continue:  China Evergrande Group (3333.HK) [Evergrande] magically made an 11th hour interest payment of USD 83.5 mn to bondholders on Friday, October 22, 2021 – escaping default by the skin of its teeth, just as its 30-day grace period with bondholders was about to end. While the market is worried about a China Huarong Asset Management (2799.HK) default crippling the country’s USD credit market, they too should understand that any bond default by Evergande likely roils this market as well; and* Worrisome Comments By  PBOC Governor Yi: The mainland Chinese government rarely comments on a single entity, which is why Governor Yi’s thoughts are alarming. “First, we’re going to try to prevent contagion to other real estate companies. Second, we’ll prevent contagion to other parts of the financial sector.” This self-inflicted wound will require a tourniquet to stop the bleeding; expect non-D-SIFI bank and insurer failures in mainland China.

*Loan Defaults and USD Bond Payments Set To Continue:  China Evergrande Group (3333.HK) [Evergrande] magically made an 11th hour interest payment of USD 83.5 mn to bondholders on Friday, October 22, 2021 – escaping default by the skin of its teeth, just as its 30-day grace period with bondholders was about to end. While the market is worried about a China Huarong Asset Management (2799.HK) default crippling the country’s USD credit market, they too should understand that any bond default by Evergande likely roils this market as well; and* Worrisome Comments By  PBOC Governor Yi: The mainland Chinese government rarely comments on a single entity, which is why Governor Yi’s thoughts are alarming. “First, we’re going to try to prevent contagion to other real estate companies. Second, we’ll prevent contagion to other parts of the financial sector.” This self-inflicted wound will require a tourniquet to stop the bleeding; expect non-D-SIFI bank and insurer failures in mainland China.

China Evergrande Group – China’s Wrecking Ball

David Blennerhassett

Last Week in Event SPACE: Singapore Air, Evergrande/Hopson, HomeCo/Aventus, Irongate, Shinsei Bank

China

China Evergrande Group is an integrated residential property developer. The Company, through its subsidiaries, operates in property development, investment, management, finance, internet, health, culture, and tourism markets.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Evergrande (3333 HK)

Evergrande Bezzle Discovered - Quantum Kitty's Regenerative Capabilities Have Nuance and Timing

Evergrande as Quantum Kitty has more lives. Coupons have been paid to avoid default, and that suggests it could be months before an offshore EoD is...

Travis Lundy

Asia Ex-Japan Real Estate: Hitting the Lows. China to India Rotation

Real Estate exposure is close to its lowest levels on record among active Asia Ex-Japan investors. As China Real Estate suffers an exodus, India...

Steven Holden

State Council to Pilot Property Tax in Certain Regions for Five Years

The widen of property tax pilot progamme would shake the real estates market,property-related industries, such as the steel and cement sectors.

Li Tang

China Evergrande Group – China’s Wrecking Ball

EVERGRANDE: Evergrande magically made an interest payment to bondholders, escaping default by the skin of its teeth. This self-inflicted wound...

Thomas J. Monaco

Last Week in Event SPACE: Singapore Air, Evergrande/Hopson, HomeCo/Aventus, Irongate, Shinsei Bank

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)