Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>A double-dose of StubWorld this week ...</p>
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<p><a href="https://www.smartkarma.com/entities/hang-lung-group-ltd" target="_blank" data-smartkarma-citation="entities:50:1" rel="noopener">Hang Lung (10 HK)</a>'s is coming up expensive on my monitor,  yet at 0.3x P/B, against 0.47x for a basket of peers, HLG is one of the cheapest property plays in Hong Kong.</p>
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<p>Preceding my comments on Hang Lung are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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A double-dose of StubWorld this week ...



Hang Lung (10 HK)'s is coming up expensive on my monitor,  yet at 0.3x P/B, against 0.47x for a basket of peers, HLG is one of the cheapest property plays in Hong Kong.

Preceding my comments on Hang Lung are the weekly setup/unwind tables for Asia-Pacific Holdcos.



These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.



StubWorld: Hang Lung Group Is Still Cheap

Equity Bottom-Up

China Evergrande New Energy Vehicle / Equity Bottom-Up

China Evergrande New Energy Vehicle (708 HK)

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<p>This week in StubWorld ...</p>
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<p><a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> plumbs a new discount to NAV low after <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a>'s meteoric post-placement gain; <a href="https://www.smartkarma.com/entities/pccw-ltd" target="_blank" data-smartkarma-citation="entities:873:1" rel="noopener">PCCW Ltd (8 HK)</a> discount to NAV retraces, as expected; and <a href="https://www.smartkarma.com/entities/lg-corp" target="_blank" data-smartkarma-citation="entities:6653:1" rel="noopener">LG Corp (003550 KS)</a> still look cheap versus its sum of parts.</p>
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<p>Preceding my comments on these holdcos are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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This week in StubWorld ...

Evergrande Real Estate Group (3333 HK) plumbs a new discount to NAV low after Evergrande Auto (708 HK)'s meteoric post-placement gain; PCCW Ltd (8 HK) discount to NAV retraces, as expected; and LG Corp (003550 KS) still look cheap versus its sum of parts.




Preceding my comments on these holdcos are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


StubWorld: Evergrande Auto, PCCW, LG Corp

Travis Lundy

<p>About 9-10 weeks ago, Chinese authorities called a dozen large real estate developers onto the carpet with very little lead time and <s>asked</s><s>proposed</s> mandated they participate in a "pilot programme" called<strong> Three Red Lines</strong>. </p><p>"Pilot programme" is a nice way of saying - <em>"Here are the new rules, and they apply to you first."</em></p><p>In this case, it meant there were three criteria, and if as a developer you met all three, your company could increase debt by 15% vs the previous year. If you met two, it was 10%, and if one, 5% was the cap. If you met none of them, you would not be allowed to increase debt. </p><p><a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> was one of those twelve companies, and it met none of the criteria to allow it to increase debt. Given the company's funding costs and extraordinarily large supplier finance position, that leaves wiggle room only to the downside. The gross book has to shrink.</p><p>Five weeks after the meeting, it was reported in local media that the company had sent a letter asking for assistance to the Guangzhou government four days after the Three Red Lines intro meeting, warning of the possibility of funding difficulties and default, in part due to a RMB 130bn (+ redemption premium) redemption of private shares issuance due at the end of January 2021. When this came out, the company denied the existence of the letter, but various media outlets said they had seen it. This was discussed in <a href="https://www.smartkarma.com/insights/evergrande-may-be-facing-a-funding-squeeze" target="_blank" data-smartkarma-citation="insights:43592" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a>.</p><p>The shares fell, and this was slightly problematic because despite having a buyback programme which allowed the company to buy back up to 10% of shares outstanding, under the HKEX Listing Rules, it only had room to buy about 20mm shares as of the end of its buyback splurge in May and June 2020.  Media outlets then reported that the company had obtained assistance in convincing many (but not all) of its investors in the Hengda Real Estate subsidiary to not ask for their money back 3 months hence. That sent the shares back up. </p><p>Then two weeks ago, the company announced a sale of up to US$1.3bn (including greenshoe) in shares at an 11.1-14.7% discount. I wrote about Evergrande's share sale in <a href="https://www.smartkarma.com/insights/evergrande-equity-placement-musical-shares" target="_blank" data-smartkarma-citation="insights:44137" rel="noopener">Evergrande Equity Placement - Musical Shares</a>. It turns out the company could not place more than about half the base amount, at the widest discount in the range, which was 3% below the average price paid in the May-June buyback highlighted in yellow.</p><p>The shares fell sharply the next day (14 October), soundly breaking the offering price. The chart below is as of close of business post-placement.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/168/419/original/Screenshot%202020-10-30%20at%2011.50.38%20AM.png?1604029859" class="editor-image img-responsive" data-smartkarma-image-id="168419"></figure><p></p></section><p>The "musical shares" I saw implied in the placement was that the amount raised was immaterial to its prospects of having an equity buffer, or in raising funds to reduce debt. It was less than one-tenth the amount of Hengda which was left without a guarantee of a refinance or extension. It was well under one half of one percent of Evergrande debt.</p><p>The lack of success of the offering caused shares to drop further, reaching HK$14.20 on Wednesday 28 October and opening below HK$14.00 yesterday. </p><p>What the placement DID do was afford Evergrande more room to buy back shares. After the buyback at end June, the company had room to buy 20mm shares. Not enough to affect much. </p><div class="content-highlight"><p>How far the stock had to drop before Evergrande made use of its new buffer to buy back shares was answered yesterday.</p></div><p>Two weeks after the placement of shares at HK$16.50 caused the shares to fall sharply from the HK$19 area to which they had rebounded, the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1029/2020102900815.pdf" target="_blank" rel="noopener">announced</a> they had bought back 900,000 shares. </p><p>This came earlier, and at a higher price, than I thought likely. Yesterday, the company bought back shares at a 10.6% discount to where they had just placed shares a week ago, and at a 7% premium to where they had been trading earlier in the day.</p><p>Subtlety is not the company's strong suit. </p><p>More discussion below the fold. </p>

About 9-10 weeks ago, Chinese authorities called a dozen large real estate developers onto the carpet with very little lead time and askedproposed mandated they participate in a "pilot programme" called Three Red Lines. "Pilot programme" is a nice way of saying - "Here are the new rules, and they apply to you first."In this case, it meant there were three criteria, and if as a developer you met all three, your company could increase debt by 15% vs the previous year. If you met two, it was 10%, and if one, 5% was the cap. If you met none of them, you would not be allowed to increase debt. Evergrande Real Estate Group (3333 HK) was one of those twelve companies, and it met none of the criteria to allow it to increase debt. Given the company's funding costs and extraordinarily large supplier finance position, that leaves wiggle room only to the downside. The gross book has to shrink.Five weeks after the meeting, it was reported in local media that the company had sent a letter asking for assistance to the Guangzhou government four days after the Three Red Lines intro meeting, warning of the possibility of funding difficulties and default, in part due to a RMB 130bn (+ redemption premium) redemption of private shares issuance due at the end of January 2021. When this came out, the company denied the existence of the letter, but various media outlets said they had seen it. This was discussed in Evergrande May Be Facing a Funding Squeeze.The shares fell, and this was slightly problematic because despite having a buyback programme which allowed the company to buy back up to 10% of shares outstanding, under the HKEX Listing Rules, it only had room to buy about 20mm shares as of the end of its buyback splurge in May and June 2020.  Media outlets then reported that the company had obtained assistance in convincing many (but not all) of its investors in the Hengda Real Estate subsidiary to not ask for their money back 3 months hence. That sent the shares back up. Then two weeks ago, the company announced a sale of up to US$1.3bn (including greenshoe) in shares at an 11.1-14.7% discount. I wrote about Evergrande's share sale in Evergrande Equity Placement - Musical Shares. It turns out the company could not place more than about half the base amount, at the widest discount in the range, which was 3% below the average price paid in the May-June buyback highlighted in yellow.The shares fell sharply the next day (14 October), soundly breaking the offering price. The chart below is as of close of business post-placement.The "musical shares" I saw implied in the placement was that the amount raised was immaterial to its prospects of having an equity buffer, or in raising funds to reduce debt. It was less than one-tenth the amount of Hengda which was left without a guarantee of a refinance or extension. It was well under one half of one percent of Evergrande debt.The lack of success of the offering caused shares to drop further, reaching HK$14.20 on Wednesday 28 October and opening below HK$14.00 yesterday. What the placement DID do was afford Evergrande more room to buy back shares. After the buyback at end June, the company had room to buy 20mm shares. Not enough to affect much. How far the stock had to drop before Evergrande made use of its new buffer to buy back shares was answered yesterday.Two weeks after the placement of shares at HK$16.50 caused the shares to fall sharply from the HK$19 area to which they had rebounded, the company announced they had bought back 900,000 shares. This came earlier, and at a higher price, than I thought likely. Yesterday, the company bought back shares at a 10.6% discount to where they had just placed shares a week ago, and at a 7% premium to where they had been trading earlier in the day.Subtlety is not the company's strong suit. More discussion below the fold. 

Evergrande Equity De-Placement: Musical Shares

Equity Capital Markets

China Evergrande / Equity Capital Markets

<p>Media reports from Bloomberg and other sources suggest that <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> has launched an equity placement - a so-called top-up placement - for 490 million shares at a price of HK$16.50-17.20, or an 11.1-14.7% discount to the last traded price of $19.34/share. There is apparently an upsize option of an additional 120mm shares.</p><p>This offer appears scheduled to raise up to US$1.043-1.087bn in funds with US$255mm more from the upsize option if done at the lower end of the range. </p><p>The news surrounding Evergrande recently has been less than salutary for investors. Despite highly bullish commentary around unofficial and unaudited figures in early July which appeared to have sent the shares soaring nearly 40% in 3 days to HK$28/share, several weeks later on 16 August the company released a profit warning and results came out the 31st of August. On the 13th Evergrande had sold a US$3bn stake in its property management vehicle, sold another block in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a>, was preparing a near-term listing of its property management entity and was looking to conduct a large offering for Evergrande Auto on the Star Board.  </p><p>Hints of further ugliness came out in the last days of August and early days of September when it was reported that a dozen real estate developers had been called into a meeting 20 August to let them know they had been chosen to participate (participation not optional) in a pilot programme which restricted lending growth to companies which did not cross Three Red Lines which were...</p><ol style="list-style-type: decimal;">
<li>a liability-to-asset ratio (excluding pre-sales) of 70%,</li>
<li>a net debt-to-equity ratio of 100%, and</li>
<li>cash holdings equal to 100% of short-term debt.</li>
</ol><p>Evergrande handily beats all three and therefore would be restricted from new borrowings (including increase outstanding debt to pay the coupons on existing debt). This means that Evergrande needs to de-lever. It reportedly has started doing so since earlier this year but it is not clear what the necessary reference points are and where Evergrande stands in relation to those reference points in terms of showing that it is making progress (if it doesn't meet the Three Red Lines thresholds, it needs to show it is making progress towards doing so in future). </p><p>The last straw was the <a href="https://uk.reuters.com/article/china-evergrande/chinas-no-2-developer-evergrande-pleads-for-government-support-to-avoid-cash-crunch-idINL3N2GL2H9" target="_blank" rel="noopener">reported</a> letter (which Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0924/2020092401313.pdf" target="_blank" rel="noopener">denied existed</a>) which had asked the Guangdong government for assistance in aligning its debt obligations and repayment schedule so that unwanted disruption and confusion in the marketplace did not occur (those tracking this story may have a slightly more blunt way of phrasing this). There was also the matter of the 3yr expiry of the Hengda equity putback coming in January 2021 if that business were not listed. This too caused consternation in the market. All of this was discussed in <a href="https://www.smartkarma.com/insights/evergrande-may-be-facing-a-funding-squeeze" target="_blank" data-smartkarma-citation="insights:43592" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a> on 27 September.</p><p>Following the news coverage, shares dropped sharply, the bonds traded weaker, but a few days later Evergrande somehow <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0929/2020092900829.pdf" target="_blank" rel="noopener">managed to convince</a> a large chunk of the equity financiers of Hengda to roll their ownership/funding for another year. That helped keep the wolves at bay for Jan 2021 but Evergrande still has a long way to go to be able to cross the Three Red Lines in the other direction. Asset sales and equitization are paramount, and along those lines, on 29 September Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0929/2020092901436.pdf" target="_blank" rel="noopener">submitted its listing application</a> to the Hong Kong Stock Exchange to list Evergrande Property Services Group. More money is on the way. </p><h2>Today's NEW News</h2><p>Evergrande has announced an equity offering to raise cash for "refinancing and working capital." The thing is, US$1.1bn or even US$1.35bn won't cut it. Evergrande has RMB 820+bn of short-term and long-term interest-bearing debt, extended accounts payable, and the Hengda contingent liability floating around. This is nothing. </p><p>So why are they doing it?</p><p>That's the thing. There IS a reason. It appears obvious to me. And it doesn't make the stock more investible. </p><p>More below the fold. </p>

Media reports from Bloomberg and other sources suggest that Evergrande Real Estate Group (3333 HK) has launched an equity placement - a so-called top-up placement - for 490 million shares at a price of HK$16.50-17.20, or an 11.1-14.7% discount to the last traded price of $19.34/share. There is apparently an upsize option of an additional 120mm shares.This offer appears scheduled to raise up to US$1.043-1.087bn in funds with US$255mm more from the upsize option if done at the lower end of the range. The news surrounding Evergrande recently has been less than salutary for investors. Despite highly bullish commentary around unofficial and unaudited figures in early July which appeared to have sent the shares soaring nearly 40% in 3 days to HK$28/share, several weeks later on 16 August the company released a profit warning and results came out the 31st of August. On the 13th Evergrande had sold a US$3bn stake in its property management vehicle, sold another block in Evergrande Auto (708 HK), was preparing a near-term listing of its property management entity and was looking to conduct a large offering for Evergrande Auto on the Star Board.  Hints of further ugliness came out in the last days of August and early days of September when it was reported that a dozen real estate developers had been called into a meeting 20 August to let them know they had been chosen to participate (participation not optional) in a pilot programme which restricted lending growth to companies which did not cross Three Red Lines which were...
a liability-to-asset ratio (excluding pre-sales) of 70%,
a net debt-to-equity ratio of 100%, and
cash holdings equal to 100% of short-term debt.
Evergrande handily beats all three and therefore would be restricted from new borrowings (including increase outstanding debt to pay the coupons on existing debt). This means that Evergrande needs to de-lever. It reportedly has started doing so since earlier this year but it is not clear what the necessary reference points are and where Evergrande stands in relation to those reference points in terms of showing that it is making progress (if it doesn't meet the Three Red Lines thresholds, it needs to show it is making progress towards doing so in future). The last straw was the reported letter (which Evergrande denied existed) which had asked the Guangdong government for assistance in aligning its debt obligations and repayment schedule so that unwanted disruption and confusion in the marketplace did not occur (those tracking this story may have a slightly more blunt way of phrasing this). There was also the matter of the 3yr expiry of the Hengda equity putback coming in January 2021 if that business were not listed. This too caused consternation in the market. All of this was discussed in Evergrande May Be Facing a Funding Squeeze on 27 September.Following the news coverage, shares dropped sharply, the bonds traded weaker, but a few days later Evergrande somehow managed to convince a large chunk of the equity financiers of Hengda to roll their ownership/funding for another year. That helped keep the wolves at bay for Jan 2021 but Evergrande still has a long way to go to be able to cross the Three Red Lines in the other direction. Asset sales and equitization are paramount, and along those lines, on 29 September Evergrande submitted its listing application to the Hong Kong Stock Exchange to list Evergrande Property Services Group. More money is on the way. Today's NEW NewsEvergrande has announced an equity offering to raise cash for "refinancing and working capital." The thing is, US$1.1bn or even US$1.35bn won't cut it. Evergrande has RMB 820+bn of short-term and long-term interest-bearing debt, extended accounts payable, and the Hengda contingent liability floating around. This is nothing. So why are they doing it?That's the thing. There IS a reason. It appears obvious to me. And it doesn't make the stock more investible. More below the fold. 

Evergrande Equity Placement - Musical Shares

<p>On the 30 July, <a href="https://www.smartkarma.com/entities/evergrande-health-industry-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Health Industry (708 HK)</a>'s (EHI) market cap surpassed the market cap of its parent (&amp; controlling shareholder) <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group (3333 HK)</a> (CEG). That 74.99% stake in ERI currently accounts for 77% of CEG's market cap.</p>
<p><strong>EHI</strong>'s entry into the new energy vehicle industry in 2019 is fuelling the share price gain, and currently trades at a nosebleed 51.8x trailing revenue, having gained 272% in the last six months.</p>
<p>But not all is beer and skittles. Short interest (in terms of shares) has increased seven-fold in the last five weeks. And the SFC just completed an inquiry into the shareholding of the company and <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0819/2020081900676.pdf" target="_blank" rel="noopener">concluded</a> there is a high concentration of shareholders.</p>
<p>Stripping out CEG's stake and 19.83% held by 18 shareholders (not named), remaining shareholders in EHI hold just 5.18% of shares out. This has all the hallmarks of bubble trouble.</p>
<p>As always, more below the fold.</p>

On the 30 July, Evergrande Health Industry (708 HK)'s (EHI) market cap surpassed the market cap of its parent (&amp; controlling shareholder) China Evergrande Group (3333 HK) (CEG). That 74.99% stake in ERI currently accounts for 77% of CEG's market cap.
EHI's entry into the new energy vehicle industry in 2019 is fuelling the share price gain, and currently trades at a nosebleed 51.8x trailing revenue, having gained 272% in the last six months.
But not all is beer and skittles. Short interest (in terms of shares) has increased seven-fold in the last five weeks. And the SFC just completed an inquiry into the shareholding of the company and concluded there is a high concentration of shareholders.
Stripping out CEG's stake and 19.83% held by 18 shareholders (not named), remaining shareholders in EHI hold just 5.18% of shares out. This has all the hallmarks of bubble trouble.
As always, more below the fold.

China Evergrande (3333 HK): Set-Up Vs. Electrified Health

Hong Kong

Chinese Estates Holdings Limited is an investment holding company primarily engaged in property investment for rental and property development. The company develops mid to high-end commercial and residential properties and manages investment properties including retail and office assets. It also has interests in building and property management, securities investment, money lending, and cosmetics distribution. The company is headquartered in Hong Kong and was founded in 1986.

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Chinese Estates (127 HK)

StubWorld: Hang Lung Group Is Still Cheap

I cannot envisage HLG privatising HLP given the pricing (P/B) disparity. I think Ronnie Chan should follow the Woo/Wheelock (20 HK) template, and...

David Blennerhassett

StubWorld: Evergrande Auto, PCCW, LG Corp

Chine Evergrande (3333 HK) looks "cheap" and Evergrande Auto (708 HK) frothy, suggesting a set-up here. Personally, I would avoid both.

David Blennerhassett

Evergrande Equity De-Placement: Musical Shares

Evergrande bought back shares in May-June, leaving little room to buy back more. Debt ructions caused share price fluctuations. The company issued...

Travis Lundy

Evergrande Equity Placement - Musical Shares

Media reports say Evergrande launched an Equity Offering to raise US$1.1bn. This is not enough to pay down RMB 450bn in debt overall or pay back...

Travis Lundy

China Evergrande (3333 HK): Set-Up Vs. Electrified Health

On the 30 July, Evergrande Health Industry (708 HK)'s (EHI) market cap surpassed the market cap of its parent (& controlling shareholder) China...

David Blennerhassett

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