Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
<p>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 <strong>discount to NAV of 93%</strong> against a one-year average of 77%. </p>
</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>
<p>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. </p>
<p>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.</p>
<p>Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in <em><a href="https://skr.ma/jrXuN" target="_blank" rel="noopener">StubWorld: What To Do With Evergrande?</a></em>; 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 <em><a href="https://skr.ma/KkUHL" target="_blank" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a></em>: </p>
<blockquote>
<p>Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.</p>
<p>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. </p>
</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: <em>"ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group</em>."</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>
<p>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.</p>
</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>
<p><strong><em>Separately ...</em></strong></p>
<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>
<p><em>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>)</em></p>
</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>
<p>The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. </p>


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

Travis Lundy

<p>Evergrande is manifesting itself now in a state not dissimilar to a famous Cat from the thought experiment devised by Erwin Schrödinger in 1935 in his discussion with Albert Einstein regarding the Einstein, Podolsky, Rosen ("EPR") article (designed to show that quantum mechanics theory was incomplete) earlier that year. </p>
<p>What the now-famous Mr Schrödinger intended as a modest proposal of sorts (he had no desire to see live and dead cats discussed as a theory) has become a mainstay of popular understanding of quantum mechanics. </p>
<p>The basic idea was a refutation of the then-dominant <a href="https://plato.stanford.edu/entries/qm-copenhagen/" target="_blank" rel="noopener">Copenhagen Interpretation</a> (the name applied to a group of ideas discussed and promoted by Neils Bohr, Werner Heisenberg, Arnold Sommerfeld, and others). Schrödinger's idea was that one could create a quantum superposition (i.e. Evergrande alive, and Evergrande dead) making the outcome dependent on a quantum particle which was in a superposition (i.e. banks are simultaneously being told not to lend, and to lend). Schrödinger's point about the cat was to show that it was kind of ridiculous having the cat be both alive and dead at the same time, but the analogy stuck. </p>
<p>Backing up a bit, one problem discovered early in the process of studying quantum mechanics was that one could not simultaneously observe and measure an electron and determine its momentum (so as to be able to catch it later and re-measure). The problem is known as the Measurement Problem. Some of the math around understanding the concept is in that related to the Heisenberg Uncertainty Principle which provides the math about accuracy and certainty. This was part of Bohr's universe of knowledge in the late 1920s and at the time, Bohr's thought was that the cause of some of the uncertainty of future electron momentum was the impact of the measurement apparatus. After the EPR paper, Bohr decided that the states of the apparatus and that which was being measured could not be separated, and instead were a single dynamic of inseparable form. </p>
<p>It is important to note that the Uncertainty Principle is not the same as the Observer Effect which suggests that measurement of certain systems cannot be made without affecting the system. Heisenberg and later Bohr used the OE as a physical reason why quantum uncertainty existed. </p>
<div class="content-highlight">
<p><em><strong>How is this related to Evergrande? </strong></em></p>
<p>Well, any analyst looking to discuss Evergrande and Schrödinger's Cat, even if doing so using Hugh Everett's "Many Worlds" Interpretation is going to put the rest of it below the fold. </p>
</div>
<p>But first some news...</p>
<h3>The NEW News</h3>
<p>On 9 August, I wrote the latest in my series on <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> in <a href="https://www.smartkarma.com/insights/evergrande-s-room-for-manoeuvre-a-question-of-confidence" target="_blank" rel="noopener">Evergrande's Room for Manoeuvre - A Question of Confidence</a>. This had followed discussion of financing difficulties and buybacks, ratings cuts, etc in <a href="https://www.smartkarma.com/insights/evergrande-s-very-special-special-dividend" target="_blank" rel="noopener">Evergrande's Very Special... Special Dividend?</a> and others. </p>
<p>There is ongoing news/suggestion of Evergrande negotiating the sale of its 55 urban renewal projects in Shenzhen, where local media suggest that potential buyers include a couple of subsidiaries of Shenzhen's SASAC (including Shenzhen Investment Holdings Ltd). This process, perhaps worth RMB 120bn as some media suggests, has been ongoing for months but more news is coming out.</p>
<p>Since Monday, we have had headlines about <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> selling all or part of its stakes in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" rel="noopener">Evergrande Auto (708 HK)</a> (which itself <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0809/2021080901359.pdf" target="_blank" rel="noopener">came out with a profit warning</a> on 9 Aug) and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" rel="noopener">Evergrande Property Services (6666 HK)</a> under pressure from Beijing, with one local HK <a href="https://inews.hket.com/article/3029626/%E3%80%90%E6%81%92%E5%A4%A73333%E3%80%91%E5%82%B3%E8%90%AC%E7%A7%91%E3%80%81%E7%A2%A7%E6%A1%82%E5%9C%92%E8%88%87%E6%81%92%E5%A4%A7%E7%89%A9%E6%A5%AD%E5%9B%A0%E5%83%B9%E6%A0%BC%E5%95%8F%E9%A1%8C%E6%9C%AA%E6%9C%89%E5%85%B1%E8%AD%98%E3%80%80%E5%B7%B2%E9%80%80%E5%87%BA%E6%94%B6%E8%B3%BC%E3%80%80%E6%81%92%E5%A4%A7%E7%89%A9%E6%A5%AD%E8%B7%8C%E9%80%BE7-%EF%BC%88%E7%AC%AC%E4%BA%8C%E7%89%88%EF%BC%89" target="_blank" rel="noopener">report</a> suggesting the entire services business could go to Vanke. Caixin suggested there were negotiations between Evergrande and others, including Vanke, CoGard, Shenzhen Metro, China Jinmao, and others, with Vanke reportedly leading the combined efforts. Shares and USD bonds of Evergrande popped. Also the units popped in price, with Evergrande Property Services rising 60% from Monday's lows to Wednesday's highs, and Evergrande Auto rising 40% from low to high. </p>
<p>It is possible that the rises in both were caused by significant short-covering. The shorts in the shares (314mm as of 30 July according to SFC data) are not quite 25% of the Real World Float. The CNY bonds - <a href="http://www.szse.cn/disclosure/listed/bulletinDetail/index.html?a45f8727-1d71-43ed-af73-7bb11aeb8033" target="_blank" rel="noopener">restricted to QIB-equivalents since Monday</a> - continued to fall. </p>
<p>Reuters additionally <a href="https://www.reuters.com/world/china/debt-laden-evergrande-says-sale-talks-certain-assets-shares-jump-2021-08-11/" target="_blank" rel="noopener">reported</a> that according to corporate search engine Tianyancha, Evergrande had pledged its holdings in Xinjiang Guanghui Industry Investment and Evergrande Life Insurance to Shengjing Bank at the end of July (and I remind readers that bank regulators have effectively instructed the local govt to <em>Do Something</em> about the fact that Evergrande owns a large stake in and may quasi-control <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>, and a large portion of its loans are to Evergrande (noting also that Shengjing was fined in the past couple of months for lending too much to real estate projects)).  </p>
<p>Late Wednesday REDD reported (and Bloomberg followed up) that Beijing had ordered the local Guangzhou government to coordinate with creditors and strategic investors (and speed things up to avoid systemic risk). There was also mention that Evergrande's debt "<em>should be resolved via a "market-oriented" approach.</em>" </p>
<p>Out Thursday early it was said that three banks had agreed to extend the maturity of loans out to Evergrande. China Minsheng Banking, China Zheshang Banking, and Shanghai Pudong Development Bank had apparently agreed to the extensions. Specifically, Zheshang apparently agreed to push repayment to year end for two loans due in July and August (i.e. one of them was already expected to have been repaid (and wasn't?)) according to a Bloomberg <a href="https://www.bloomberg.com/news/articles/2021-08-12/evergrande-gets-loan-extensions-from-several-major-creditors" target="_blank" rel="noopener">article</a>. </p>
<p>Thursday afternoon, state media China National Radio, work had been halted on two projects in Kunming, one of them with overdue payments of RMB 210 million (China Yicai <a href="https://www.yicaiglobal.com/news/evergrande-stock-drops-further-as-yunnan-housing-projects-are-halted-over-unpaid-dues" target="_blank" rel="noopener">article</a>).</p>
<p>Late Thursday, it was reported that Vanke and Country Garden had removed themselves from negotiations on Evergrande Property Services because of differences on price. Personally, I think Evergrande Auto (708) may be unsellable. </p>
<p>A WSJ <a href="https://www.wsj.com/articles/evergrandes-enormous-bill-finally-comes-due-11628761706?mod=djemheard_t" target="_blank" rel="noopener">commentary</a> by columnist Jacky Wong noted there are ever more stories about trade payables not getting paid, and counterparts refusing to take commercial acceptance bills. </p>
<p>And very late Thursday there were <a href="https://www.straitstimes.com/business/companies-markets/china-halts-approvals-for-new-residential-real-estate-funds" target="_blank" rel="noopener">articles</a> that China had halted private equity firms from raising money to invest in residential property developments. The govt-endorsed Asset Management Association of China (AMAC) apparently told private equity firms that it would not accept new registrations for funds to invest in projects, and would reject the applications already in. Existing funds would not be affected. While not a direct hit to Evergrande, what it means is this particular avenue for being able to sell down project assets is no longer a possibility.</p>
<p><em>Discussion of how to read between the lines of the news, and Evergrande's existence as a quantum mechanical phenomenon continues below the fold.</em></p>

Evergrande is manifesting itself now in a state not dissimilar to a famous Cat from the thought experiment devised by Erwin Schrödinger in 1935 in his discussion with Albert Einstein regarding the Einstein, Podolsky, Rosen ("EPR") article (designed to show that quantum mechanics theory was incomplete) earlier that year. 
What the now-famous Mr Schrödinger intended as a modest proposal of sorts (he had no desire to see live and dead cats discussed as a theory) has become a mainstay of popular understanding of quantum mechanics. 
The basic idea was a refutation of the then-dominant Copenhagen Interpretation (the name applied to a group of ideas discussed and promoted by Neils Bohr, Werner Heisenberg, Arnold Sommerfeld, and others). Schrödinger's idea was that one could create a quantum superposition (i.e. Evergrande alive, and Evergrande dead) making the outcome dependent on a quantum particle which was in a superposition (i.e. banks are simultaneously being told not to lend, and to lend). Schrödinger's point about the cat was to show that it was kind of ridiculous having the cat be both alive and dead at the same time, but the analogy stuck. 
Backing up a bit, one problem discovered early in the process of studying quantum mechanics was that one could not simultaneously observe and measure an electron and determine its momentum (so as to be able to catch it later and re-measure). The problem is known as the Measurement Problem. Some of the math around understanding the concept is in that related to the Heisenberg Uncertainty Principle which provides the math about accuracy and certainty. This was part of Bohr's universe of knowledge in the late 1920s and at the time, Bohr's thought was that the cause of some of the uncertainty of future electron momentum was the impact of the measurement apparatus. After the EPR paper, Bohr decided that the states of the apparatus and that which was being measured could not be separated, and instead were a single dynamic of inseparable form. 
It is important to note that the Uncertainty Principle is not the same as the Observer Effect which suggests that measurement of certain systems cannot be made without affecting the system. Heisenberg and later Bohr used the OE as a physical reason why quantum uncertainty existed. 

How is this related to Evergrande? 
Well, any analyst looking to discuss Evergrande and Schrödinger's Cat, even if doing so using Hugh Everett's "Many Worlds" Interpretation is going to put the rest of it below the fold. 

But first some news...
The NEW News
On 9 August, I wrote the latest in my series on Evergrande Real Estate Group (3333 HK) in Evergrande's Room for Manoeuvre - A Question of Confidence. This had followed discussion of financing difficulties and buybacks, ratings cuts, etc in Evergrande's Very Special... Special Dividend? and others. 
There is ongoing news/suggestion of Evergrande negotiating the sale of its 55 urban renewal projects in Shenzhen, where local media suggest that potential buyers include a couple of subsidiaries of Shenzhen's SASAC (including Shenzhen Investment Holdings Ltd). This process, perhaps worth RMB 120bn as some media suggests, has been ongoing for months but more news is coming out.
Since Monday, we have had headlines about Evergrande Real Estate Group (3333 HK) selling all or part of its stakes in Evergrande Auto (708 HK) (which itself came out with a profit warning on 9 Aug) and Evergrande Property Services (6666 HK) under pressure from Beijing, with one local HK report suggesting the entire services business could go to Vanke. Caixin suggested there were negotiations between Evergrande and others, including Vanke, CoGard, Shenzhen Metro, China Jinmao, and others, with Vanke reportedly leading the combined efforts. Shares and USD bonds of Evergrande popped. Also the units popped in price, with Evergrande Property Services rising 60% from Monday's lows to Wednesday's highs, and Evergrande Auto rising 40% from low to high. 
It is possible that the rises in both were caused by significant short-covering. The shorts in the shares (314mm as of 30 July according to SFC data) are not quite 25% of the Real World Float. The CNY bonds - restricted to QIB-equivalents since Monday - continued to fall. 
Reuters additionally reported that according to corporate search engine Tianyancha, Evergrande had pledged its holdings in Xinjiang Guanghui Industry Investment and Evergrande Life Insurance to Shengjing Bank at the end of July (and I remind readers that bank regulators have effectively instructed the local govt to Do Something about the fact that Evergrande owns a large stake in and may quasi-control Shengjing Bank Co Ltd H (2066 HK), and a large portion of its loans are to Evergrande (noting also that Shengjing was fined in the past couple of months for lending too much to real estate projects)).  
Late Wednesday REDD reported (and Bloomberg followed up) that Beijing had ordered the local Guangzhou government to coordinate with creditors and strategic investors (and speed things up to avoid systemic risk). There was also mention that Evergrande's debt "should be resolved via a "market-oriented" approach." 
Out Thursday early it was said that three banks had agreed to extend the maturity of loans out to Evergrande. China Minsheng Banking, China Zheshang Banking, and Shanghai Pudong Development Bank had apparently agreed to the extensions. Specifically, Zheshang apparently agreed to push repayment to year end for two loans due in July and August (i.e. one of them was already expected to have been repaid (and wasn't?)) according to a Bloomberg article. 
Thursday afternoon, state media China National Radio, work had been halted on two projects in Kunming, one of them with overdue payments of RMB 210 million (China Yicai article).
Late Thursday, it was reported that Vanke and Country Garden had removed themselves from negotiations on Evergrande Property Services because of differences on price. Personally, I think Evergrande Auto (708) may be unsellable. 
A WSJ commentary by columnist Jacky Wong noted there are ever more stories about trade payables not getting paid, and counterparts refusing to take commercial acceptance bills. 
And very late Thursday there were articles that China had halted private equity firms from raising money to invest in residential property developments. The govt-endorsed Asset Management Association of China (AMAC) apparently told private equity firms that it would not accept new registrations for funds to invest in projects, and would reject the applications already in. Existing funds would not be affected. While not a direct hit to Evergrande, what it means is this particular avenue for being able to sell down project assets is no longer a possibility.
Discussion of how to read between the lines of the news, and Evergrande's existence as a quantum mechanical phenomenon continues below the fold.

Evergrande as a Study of Quantum Mechanics Theory

<div>
<p>In StubWorld this week ...</p>
</div>
<div>
<div>
<div class="content-highlight">
<p><a href="https://www.smartkarma.com/entities/indofood-sukses-makmur-tbk-p" target="_blank" data-smartkarma-citation="entities:1053:1" rel="noopener"></a>Beleaguered <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>'s shares bounced after the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0810/2021081001009.pdf" target="_blank" rel="noopener">said</a> it is in talks to sell stakes in two of its units. But optimism over improved capital management appears naive. </p>
</div>
</div>
</div>
<div>
<p>Preceding my comments on Evergrande are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
</div>
<div>
<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>
</div>
<div>
<p>As always, more below the fold.</p>
</div>


In StubWorld this week ...




Beleaguered Evergrande Real Estate Group (3333 HK)'s shares bounced after the company said it is in talks to sell stakes in two of its units. But optimism over improved capital management appears naive. 




Preceding my comments on Evergrande 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%.


As always, more below the fold.


<p><a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by <a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" rel="noopener">Chinese Estates Holdings (127 HK)</a> and its owners. </p>
<p>When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair's breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. </p>
<p>Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair's breadth of the free float limit, and in the period, shares rose about 50%. </p>
<p>Then at the start of H2, with a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0701/2020070100031.pdf" target="_blank" rel="noopener">press release</a> about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0813/2020081301678.pdf" target="_blank" rel="noopener">disclosed</a> it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0816/2020081600097.pdf" target="_blank" rel="noopener">profit warning</a>, just before releasing H1 results. </p>
<p>Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at high single digits to 10+% interest rates are used to carry ever more non-interest-earning land bank. But Evergrande "met" all three so needed to reduce debt and raise cash, discussed in <a href="https://www.smartkarma.com/insights/evergrande-may-be-facing-a-funding-squeeze" target="_blank" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a>. </p>
<p>There was a story about a "letter", later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande's major onshore operating unit Hengda. Evergrande denied the <em>existence</em> of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government's help, Evergrande announced a new agreement meaning repayment in January 2021 was unnecessary. The shares rallied and two weeks later Evergrande raised some capital (discussed in <a href="https://www.smartkarma.com/insights/evergrande-equity-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity Placement - Musical Shares</a>).</p>
<p>I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started <em>buying back</em> shares, reasonably quickly raising the price above where it had sold shares. This was discussed in <a href="https://www.smartkarma.com/insights/evergrande-equity-de-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity De-Placement: Musical Shares</a>. Then a couple weeks later, we saw <a href="https://www.smartkarma.com/insights/evergrande" target="_blank" rel="noopener">Evergrande Terminate Hengda's Backdoor Listing</a> so the story left was one of an optically "cheap" but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered. But shares fell. </p>
<p>There were stories in Chinese media and in social media about issues with the company's trade acceptance bills. An <a href="https://www.bloomberg.com/news/articles/2021-07-09/china-urged-evergrande-founder-to-find-quick-fix-for-debt-woes" target="_blank" rel="noopener">article</a> on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company's debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. </p>
<p>Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity. Wednesday, the shares closed at HK$8.91 - lowest in four years. </p>
<h3>Yesterday, there was new news. </h3>
<p>The company announced a board meeting for 27 July where the Board would consider a special dividend. </p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/832/original/Screenshot+2021-07-16+at+10.05.32+AM.png?1626401169" class="editor-image img-responsive" data-smartkarma-image-id="218832"></figure>
</section>
<p></p>
<p>My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.</p>
<p>The immediate public comments I have seen suggested an attempt to squeeze shorts. According to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.</p>
<p>The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to <em>Do Something</em> - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders? </p>
<p>I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. </p>
<p><br><br></p>

Evergrande Real Estate Group (3333 HK) shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by Chinese Estates Holdings (127 HK) and its owners. 
When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair's breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. 
Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair's breadth of the free float limit, and in the period, shares rose about 50%. 
Then at the start of H2, with a press release about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company disclosed it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a profit warning, just before releasing H1 results. 
Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at high single digits to 10+% interest rates are used to carry ever more non-interest-earning land bank. But Evergrande "met" all three so needed to reduce debt and raise cash, discussed in Evergrande May Be Facing a Funding Squeeze. 
There was a story about a "letter", later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande's major onshore operating unit Hengda. Evergrande denied the existence of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government's help, Evergrande announced a new agreement meaning repayment in January 2021 was unnecessary. The shares rallied and two weeks later Evergrande raised some capital (discussed in Evergrande Equity Placement - Musical Shares).
I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started buying back shares, reasonably quickly raising the price above where it had sold shares. This was discussed in Evergrande Equity De-Placement: Musical Shares. Then a couple weeks later, we saw Evergrande Terminate Hengda's Backdoor Listing so the story left was one of an optically "cheap" but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered. But shares fell. 
There were stories in Chinese media and in social media about issues with the company's trade acceptance bills. An article on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company's debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. 
Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity. Wednesday, the shares closed at HK$8.91 - lowest in four years. 
Yesterday, there was new news. 
The company announced a board meeting for 27 July where the Board would consider a special dividend. 




My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.
The immediate public comments I have seen suggested an attempt to squeeze shorts. According to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.
The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to Do Something - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders? 
I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. 
  

Evergrande's Very Special... Special Dividend?

Founder of Antler Capital

Stanley Tsai, CFA

Thematic (Sector/Industry)

<p>In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. </p>
<p><strong>Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. </strong>We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.</p>
<p><strong>Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. </strong>To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.</p>
<p><strong>However, our team selections are not investment recommendations. </strong>Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.</p>
<p><strong>With that out of the way, the following is our starting XI.</strong> We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).</p>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 726.047px;"><strong>Exhibit 1: China Financials | Silver Linings Playbook</strong></td>
</tr>
<tr>
<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/213/768/original/image_768460236451623962508577.png?1623962508" class="editor-image img-responsive" data-smartkarma-image-id="213768"></figure>
<p></p>
<p>Source: Our analysis</p>
</td>
</tr>
</tbody>
</table>
<p><strong>Related Insights</strong></p>
<p><a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </p>
<p><a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> </p>
<p><a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </p>
<p><a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </p>
<p><a href="https://www.smartkarma.com/insights/glut-and-famine-china-s-monetary-conditions-a-notch-tighter-in-may" target="_blank" data-smartkarma-citation="insights:51799" rel="noopener">Glut and Famine: China's Monetary Conditions a Notch Tighter in May</a> </p>
<p><a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> </p>
<p><a href="https://www.smartkarma.com/insights/boc-aviation-2588-hk-the-stars-don-t-look-bigger-but-they-do-look-brighter" target="_blank" data-smartkarma-citation="insights:52283" rel="noopener">BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter</a></p>

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
China Macro: PPI Peaks, while CPI Eases Tightening Fears 
China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

China

Shengjing Bank Co. Ltd. provides banking services. The Company offers various financial services, funds business, international business, and investment services for individuals and small and medium enterprises.

Price Gauge
52-week Range	0.00 - 0.00
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Shengjing Bank Co Ltd H (2066 HK)

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China Financials: Silver Linings Playbook

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Stanley Tsai, CFA

Price Gauge

52-week Range

Market Cap (USDm)

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