Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Evergrande Property Services / Event-Driven

The plight 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>, the "world's most indebted property developer" has been exhaustively covered and picked apart both here at Smartkarma and in the media. (Although I highly recommend <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a>'s Bloomberg <a href="https://www.bloomberg.com/news/articles/2021-09-20/understanding-evergrande-the-chinese-real-estate-conglomerate-that-s-nearing-collapse?sref=frV97TwV" target="_blank" rel="noopener">podcast</a> for his bird's eye synopsis).
Concerns for the embattled real estate play are leading to formerly friendly and close shareholders exiting at massive losses, such as recently suspended <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> (as discussed in <a href="https://skr.ma/1HQM2" target="_blank" rel="noopener">Chinese Estates (127 HK): Potential Privatisation?</a>); and spreading to smaller investors such as <a href="https://www.smartkarma.com/entities/blue-river-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20130:1" rel="noopener">Blue River Holdings (498 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1004/2021100403346.pdf" target="_blank" rel="noopener">dumping</a> <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 Vehicle (708 HK)</a> (reportedly missed its last payroll payment) at a material loss - Blue River also sold stakes in Evergrande and <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). <a href="https://www.smartkarma.com/entities/china-strategic-hldgs-ltd" target="_blank" data-smartkarma-citation="entities:20588:1" rel="noopener">China Strategic Hldgs (235 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0921/2021092101057.pdf" target="_blank" rel="noopener">announced</a> on the 21 September it proposes to sell its 1.37% stake in Evergrande Vehicle. 
Evergrande has also been selling off assets, most recently a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0929/2021092900039.pdf" target="_blank" rel="noopener">19.93% stake</a> in <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" data-smartkarma-citation="entities:96:1" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a> for ~RMB10bn. 
Now we have Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1004/2021100400771.pdf" target="_blank" rel="noopener">suspended</a> due to a material transaction; EPS due to a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1004/2021100400799.pdf" target="_blank" rel="noopener">possible general Offer</a>; and the intriguing part, <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> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1004/2021100400101.pdf" target="_blank" rel="noopener">suspended</a> due the acquisition of a company "and the relevant possible mandatory offer to acquire the shares of the" company.
China's state-backed Global Times <a href="https://www.globaltimes.cn/page/202110/1235627.shtml" target="_blank" rel="noopener">said</a> Hopson will buy a 51% stake in EPS "and the deal could be valued at more than 40 billion HKD" ($5.1bn). One of those media sources appears to be <a href="https://www.cls.cn/detail/846513" target="_blank" rel="noopener">Cailian Press</a>, which also has SOE affiliation. Jiemian.com, Cailian's sister publication - the two merged in <a href="https://www.chinamoneynetwork.com/2018/02/28/chinese-media-firms-jiemian-cailian-press-merge-creating-financial-information-giant" target="_blank" rel="noopener">February 2018</a> - <a href="https://www.jiemian.com/article/6667341.html" target="_blank" rel="noopener">reckons</a> the fine print on a deal won't be known for a few days.<a href="https://www.jiemian.com/article/6667341.html" target="_blank" rel="noopener"></a>
All three companies remain suspended at the time of writing. Given this transaction could come out any old way, this insight touches on some of the permutations Hopson may take to gain majority control in EPS, if that is the end-game.

The plight of Evergrande (3333 HK), the "world's most indebted property developer" has been exhaustively covered and picked apart both here at Smartkarma and in the media. (Although I highly recommend Travis Lundy's Bloomberg podcast for his bird's eye synopsis).
Concerns for the embattled real estate play are leading to formerly friendly and close shareholders exiting at massive losses, such as recently suspended Chinese Estates Holdings (127 HK) (as discussed in Chinese Estates (127 HK): Potential Privatisation?); and spreading to smaller investors such as Blue River Holdings (498 HK) dumping Evergrande Vehicle (708 HK) (reportedly missed its last payroll payment) at a material loss - Blue River also sold stakes in Evergrande and Evergrande Property Services (6666 HK) (EPS). China Strategic Hldgs (235 HK) announced on the 21 September it proposes to sell its 1.37% stake in Evergrande Vehicle. 
Evergrande has also been selling off assets, most recently a 19.93% stake in Shengjing Bank Co Ltd H (2066 HK) for ~RMB10bn. 
Now we have Evergrande suspended due to a material transaction; EPS due to a possible general Offer; and the intriguing part, Hopson Development (754 HK) suspended due the acquisition of a company "and the relevant possible mandatory offer to acquire the shares of the" company.
China's state-backed Global Times said Hopson will buy a 51% stake in EPS "and the deal could be valued at more than 40 billion HKD" ($5.1bn). One of those media sources appears to be Cailian Press, which also has SOE affiliation. Jiemian.com, Cailian's sister publication - the two merged in February 2018 - reckons the fine print on a deal won't be known for a few days.
All three companies remain suspended at the time of writing. Given this transaction could come out any old way, this insight touches on some of the permutations Hopson may take to gain majority control in EPS, if that is the end-game.

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<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> is a Chinese property management provider. The controlling shareholder is the <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a>, which represents 60.96% of outstanding shares. It floated on 2 December 2020 to raise net proceeds of US$930 million (gross proceeds around US$1.8 billion) at HK$8.80 per share.  Evergrande Property Services entered a trading halt today pursuant to the Hong Kong Code on Takeovers and Mergers. Evergrande is in talks to sell a 51% controlling stake 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> for more than HK$40 billion ($5 billion), according to the Chinese financial news platform Cailian. Hopson also entered a trading halt today citing a major transaction to acquire the shares of a company listed on the HKEx and the relevant possible mandatory offer pursuant to the Hong Kong Code on Takeovers and Mergers.The potential stake sale was anticipated as Evergrande flagged on 14 September that it was actively exploring with potential investors the sales of part of its interests 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> and Evergrande Property Services.The rumoured Evergrande Property Services valuation implies a possible general offer of HK$3.70 per share, a -27.7% discount to the last close price of HK$5.12 per share. The steep discount to the last close is perhaps unsurprisingly as Evergrande is a distressed seller. The potential sale even at a distressed price could help Evergrande buy short-term breathing space to its liquidity issues.    If the potential deal materialises, Evergrande will cease to be the controlling shareholder and hold 9.96% of the outstanding shares. Evergrande Property Services’ shares have sunk 41% YTD due to the liquidity issues plaquing Evergrande. A new controlling shareholder will gradually reduce Evergrande Property Services reliance on Evergrande and also remove a significant share overhang.<div class="content-highlight">
Clearly, there will be limited shareholders who will accept the possible general offer price at a -27.7% discount to the last close. In the short term, Evergrande Property Services shares will likely be under pressure until the deal closes and there are some signs of closure on Evergrande's liquidity issues. 
While this potential transaction represents a sale at a distressed price (below the all-time low share price), the shift to a more stable controlling shareholder along with a market focus on fundamentals/valuation will help in the re-rating of Evergrande Property Services over the medium-term. 
</div>

Evergrande Property Services (6666 HK) is a Chinese property management provider. The controlling shareholder is the Evergrande (3333 HK), which represents 60.96% of outstanding shares. It floated on 2 December 2020 to raise net proceeds of US$930 million (gross proceeds around US$1.8 billion) at HK$8.80 per share.  Evergrande Property Services entered a trading halt today pursuant to the Hong Kong Code on Takeovers and Mergers. Evergrande is in talks to sell a 51% controlling stake to Hopson Development (754 HK) for more than HK$40 billion ($5 billion), according to the Chinese financial news platform Cailian. Hopson also entered a trading halt today citing a major transaction to acquire the shares of a company listed on the HKEx and the relevant possible mandatory offer pursuant to the Hong Kong Code on Takeovers and Mergers.The potential stake sale was anticipated as Evergrande flagged on 14 September that it was actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services.The rumoured Evergrande Property Services valuation implies a possible general offer of HK$3.70 per share, a -27.7% discount to the last close price of HK$5.12 per share. The steep discount to the last close is perhaps unsurprisingly as Evergrande is a distressed seller. The potential sale even at a distressed price could help Evergrande buy short-term breathing space to its liquidity issues.    If the potential deal materialises, Evergrande will cease to be the controlling shareholder and hold 9.96% of the outstanding shares. Evergrande Property Services’ shares have sunk 41% YTD due to the liquidity issues plaquing Evergrande. A new controlling shareholder will gradually reduce Evergrande Property Services reliance on Evergrande and also remove a significant share overhang.
Clearly, there will be limited shareholders who will accept the possible general offer price at a -27.7% discount to the last close. In the short term, Evergrande Property Services shares will likely be under pressure until the deal closes and there are some signs of closure on Evergrande's liquidity issues. 
While this potential transaction represents a sale at a distressed price (below the all-time low share price), the shift to a more stable controlling shareholder along with a market focus on fundamentals/valuation will help in the re-rating of Evergrande Property Services over the medium-term. 


Hopson Development’s Potential 51% Stake in Evergrande Property Services

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Trading in <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> was halted pre-market today along with <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> and <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>.There are reports now that <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> is looking to buy 51% 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> at a valuation of more than HK$40bn. This amends an earlier report that <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> would pay HK$40bn for 51% of <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>. The HK$40bn number values <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> at HK$3.7/share, a 27.7% discount  to its last close.<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> will need to make a Mandatory General Offer (MGO) to all existing shareholders in cash at HK$3.70/share or higher. With a closing low of HK$4.03/share since listing, it is unlikely that there will be many takers in the MGO.<a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> is a very high probability deletion from the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> at the December rebalance and is expected to be replaced by <a href="https://www.smartkarma.com/entities/xinyi-solar-holdings-ltd" target="_blank" data-smartkarma-citation="entities:318:1" rel="noopener">Xinyi Solar Holdings (968 HK)</a>.<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> is also an <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> constituent and is a high probability deletion from the index at the March 2022 review, where <a href="https://www.smartkarma.com/entities/innovent-biologics-inc" target="_blank" data-smartkarma-citation="entities:27452:1" rel="noopener">Innovent Biologics Inc (1801 HK)</a> is a potential inclusion.

Trading in Hopson Development (754 HK) was halted pre-market today along with Evergrande (3333 HK) and Evergrande Property Services (6666 HK).There are reports now that Hopson Development (754 HK) is looking to buy 51% in Evergrande Property Services (6666 HK) at a valuation of more than HK$40bn. This amends an earlier report that Hopson Development (754 HK) would pay HK$40bn for 51% of Evergrande Property Services (6666 HK). The HK$40bn number values Evergrande Property Services (6666 HK) at HK$3.7/share, a 27.7% discount  to its last close.Hopson Development (754 HK) will need to make a Mandatory General Offer (MGO) to all existing shareholders in cash at HK$3.70/share or higher. With a closing low of HK$4.03/share since listing, it is unlikely that there will be many takers in the MGO.Evergrande (3333 HK) is a very high probability deletion from the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance and is expected to be replaced by Xinyi Solar Holdings (968 HK).Evergrande Property Services (6666 HK) is also an Hang Seng China Enterprises Index (HSCEI INDEX) constituent and is a high probability deletion from the index at the March 2022 review, where Innovent Biologics Inc (1801 HK) is a potential inclusion.

Hopson (754 HK) To Buy 51% of Evergrande Property Services? Upcoming MGO & Potential HSCEI Changes

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Thematic (Sector/Industry)

China property management companies (PMCs) have had a dramatic pull back despite asset-light models and strong earnings visibility. We think it gives investors a chance to accumulate positions in the leaders of the industry.In this note, we take a brief look at the industry, how the PMCs have traded, and share some thoughts on which names that could continue to do well in the industry.

China property management companies (PMCs) have had a dramatic pull back despite asset-light models and strong earnings visibility. We think it gives investors a chance to accumulate positions in the leaders of the industry.In this note, we take a brief look at the industry, how the PMCs have traded, and share some thoughts on which names that could continue to do well in the industry.

China Property Management Services - Pullback Is a Chance to Accumulate the Leaders

<div>
I estimate <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group (3333 HK)</a> (CEG) is trading at an extraordinary discount to NAV of 93% against a one-year average of 77%. 
</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/889/original/image_37048166931631684887321.png?1631684888" class="editor-image img-responsive" data-smartkarma-image-id="229889"></figure>
</div>
<div style="text-align: left;" class="content-caption">Source: CapIQ, my estimates. According to <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" data-smartkarma-citation="entities:96:1" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0408/2021040802085.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to <a href="https://www.smartkarma.com/entities/hengten-networks-group-ltd" target="_blank" data-smartkarma-citation="entities:3296:1" rel="noopener">HengTen Ltd (136 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0427/2021042700547.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds <a href="https://di.hkex.com.hk/di/NSForm2.aspx?fn=CS20210826E00320&amp;sa2=as&amp;sid=223&amp;corpn=HengTen+Networks+Group+Ltd.&amp;sd=15%2f09%2f2020&amp;ed=15%2f09%2f2021&amp;cid=0&amp;sa1=cl&amp;scsd=15%2f09%2f2020&amp;sced=15%2f09%2f2021&amp;sc=136&amp;src=MAIN&amp;lang=EN&amp;g_lang=en&amp;" target="_blank" rel="noopener">26.55%</a>.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.</div>
The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. 
The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.
Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in <a href="https://skr.ma/jrXuN" target="_blank" rel="noopener">StubWorld: What To Do With Evergrande?</a>; and in greater depth by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a>, in which he said in his latest insight <a href="https://skr.ma/KkUHL" target="_blank" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a>: 
<blockquote>
Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.
Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. 
</blockquote>
<ul style="list-style-type: disc;">
<li>It need not be said, the general consensus is bearish.</li>
</ul>
<hr>
<div>
<h3>The New News</h3>
<ul>
<li>Early yesterday morning, Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0914/2021091400059.pdf" target="_blank" rel="noopener">announced</a> it expects significant declines in contract sales in September.</li>
<li>Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.</li>
<li>Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: "ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group."</li>
<li>Evergrande added it is actively exploring with potential investors the sales of part of its interests 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> and <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> - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.</li>
</ul>
<blockquote>
In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.
</blockquote>
<ul>
<li>Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.</li>
</ul>
Separately ...
<ul>
<li>Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. </li>
<li>This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, <a href="https://www.thestandard.com.hk/section-news/section/2/234150/Evergrande-tries-to-calm-investors" target="_blank" rel="noopener">The Standard</a>, and others. </li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/892/original/image?1631686617" class="editor-image img-responsive" data-smartkarma-image-id="229892"></figure>
Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: <a href="https://www.mingtiandi.com/real-estate/finance-real-estate/china-evergrande-hires-houlihan-lokey-as-financial-advisor/" target="_blank" rel="noopener">Mingtiandi</a>)
</div>
<div>
<ul>
<li>Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. </li>
<li>Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). </li>
</ul>
</div>
The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend.


I estimate China Evergrande Group (3333 HK) (CEG) is trading at an extraordinary discount to NAV of 93% against a one-year average of 77%. 




Source: CapIQ, my estimates. According to Shengjing Bank Co Ltd H (2066 HK)'s 2020 annual report (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to HengTen Ltd (136 HK)'s 2020 annual report (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds 26.55%.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.
The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. 
The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.
Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in StubWorld: What To Do With Evergrande?; and in greater depth by Travis Lundy, in which he said in his latest insight Evergrande as a Study of Quantum Mechanics Theory: 

Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.
Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. 


It need not be said, the general consensus is bearish.



The New News

Early yesterday morning, Evergrande announced it expects significant declines in contract sales in September.
Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.
Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: "ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group."
Evergrande added it is actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services (6666 HK) - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.


In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.


Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.

Separately ...

Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. 
This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, The Standard, and others. 


Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: Mingtiandi)



Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. 
Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). 


The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. 

Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting

China

Evergrande Property Services Group Limited operates as property management service providers. The Company provides property management services for high-end residential, theme parks, industrial parks, healthcare complexes, and other buildings. Evergrande Property Services Group offers services in China.

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