Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<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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<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?

David Blennerhassett

China Evergrande New Energy Vehicle / Event-Driven

China Evergrande New Energy Vehicle (708 HK)

<div>
<p>This week in StubWorld ...</p>
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<p>A bubble warning on <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> from state-media suggests <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>, at a 77% discount to NAV, is a better bet.</p>
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</div>
</div>
<div>
<p>Preceding my comments on Evergrande are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
</div>
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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>
</div>


This week in StubWorld ...




A bubble warning on Evergrande Auto (708 HK) from state-media suggests Evergrande Real Estate Group (3333 HK), at a 77% discount to NAV, is a better bet.




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%.


StubWorld: Evergrande Auto's Bubble Trouble

<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

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Equity Bottom-Up

<p>Small regional bank <a href="https://www.smartkarma.com/entities/96" target="_blank" data-smartkarma-citation="entities:96:1">Shengjing Bank Co Ltd H (2066 HK)</a>, primarily operating in the north and north east of China, shows the severity of funding pressure. We <a href="https://www.smartkarma.com/insights/china-banks-ping-an-bank-not-likely-to-be-alone-in-surging-funding-operating-costs" target="_blank">saw</a> this with <a href="https://www.smartkarma.com/entities/681" target="_blank" data-smartkarma-citation="entities:681:1">Ping An Bank Co Ltd A (000001 CH)</a> as well, where interest income growth is not keeping up with interest expense growth. SBC is now reporting net interest margins at just 1.50% for last year, down from 1.75% in 2016 and from 2.14% in 2015.  While credit costs and credit quality remains a critical focus for us, we must not lose…</p>

Small regional bank Shengjing Bank Co Ltd H (2066 HK), primarily operating in the north and north east of China, shows the severity of funding pressure. We saw this with Ping An Bank Co Ltd A (000001 CH) as well, where interest income growth is not keeping up with interest expense growth. SBC is now reporting net interest margins at just 1.50% for last year, down from 1.75% in 2016 and from 2.14% in 2015.  While credit costs and credit quality remains a critical focus for us, we must not lose…

China Banks – Severe Yield Pressure at Shengjing Bank

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.

Equity Capital Markets

<p>Jiangxi Bank, a Chinese city commercial bank, has filed a draft prospectus for a Hong Kong IPO. Jiangxi Bank has superior growth and profitability metrics in comparison to its peer group of city commercial banks. Jiangxi Bank’s strong profitability is due to its high net interest margin (NIM). However, this is tempered by asset quality indicators which are worse than its peer group. Our overall view is that the IPO should be offered at a rating which is at best, in line with its peers due to the following factors:</p><ol><li>While the average city commercial banks' net profit growth declined from 14% in 2016 to 9% in H117, Jiangxi Bank’s net profit growth substantially increased from 117% in 2016 to 124% in the first nine months of 2017. The net profit growth was driven by asset growth with Jiangxi Bank’s total assets growing twice the rate of the average city commercial bank.</li><li>However, since 2015, Jiangxi’s non-performing loan (NPL) ratio is higher than the average city commercial bank's NPL ratio. In 2016, Jiangxi’s Bank NPL ratio was 20 basis points higher than the average city commercial bank.</li><li>Markedly, a lead indicator for future NPLs paints a worrying picture. Jiangxi Bank’s special mention loan ratio is high even though it declined from 9.7% in 2015 to 4.0% in the first nine months of 2017. In contrast, the average city commercial bank's ratio decreased from 2.7% in 2015 to 2.4% in 1H17.</li></ol><p>We will provide a view of valuation once the IPO price range is announced.</p>

Jiangxi Bank, a Chinese city commercial bank, has filed a draft prospectus for a Hong Kong IPO. Jiangxi Bank has superior growth and profitability metrics in comparison to its peer group of city commercial banks. Jiangxi Bank’s strong profitability is due to its high net interest margin (NIM). However, this is tempered by asset quality indicators which are worse than its peer group. Our overall view is that the IPO should be offered at a rating which is at best, in line with its peers due to the following factors:While the average city commercial banks' net profit growth declined from 14% in 2016 to 9% in H117, Jiangxi Bank’s net profit growth substantially increased from 117% in 2016 to 124% in the first nine months of 2017. The net profit growth was driven by asset growth with Jiangxi Bank’s total assets growing twice the rate of the average city commercial bank.However, since 2015, Jiangxi’s non-performing loan (NPL) ratio is higher than the average city commercial bank's NPL ratio. In 2016, Jiangxi’s Bank NPL ratio was 20 basis points higher than the average city commercial bank.Markedly, a lead indicator for future NPLs paints a worrying picture. Jiangxi Bank’s special mention loan ratio is high even though it declined from 9.7% in 2015 to 4.0% in the first nine months of 2017. In contrast, the average city commercial bank's ratio decreased from 2.7% in 2015 to 2.4% in 1H17.We will provide a view of valuation once the IPO price range is announced.

Jiangxi Bank IPO Preview: Strong Growth Offset by Weak Asset Quality

China

Shengjing Bank is a commercial bank offering a comprehensive range of banking and financial services, including corporate loans, personal loans, deposit-taking, wealth management, and trade financing, through its Corporate Banking, Retail Banking, and Treasury Business segments. The bank was established in 1997 and is headquartered in Shenyang, Liaoning Province, China.

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Shengjing Bank (2066 HK)

Evergrande's Very Special... Special Dividend?

Evergrande has been in a world of hurt, actively selling down assets. It has repaid some short-term bonds, but commercial bills remain an issue. So...

Travis Lundy

StubWorld: Evergrande Auto's Bubble Trouble

CEA's hare price appears unsustainable. Xinhua's commentary is stating the obvious. CEG is a set-up here versus CEA. CEG is tightly held. It would...

David Blennerhassett

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

China Banks – Severe Yield Pressure at Shengjing Bank

Small regional bank Shengjing Bank Co Ltd H (2066 HK), primarily operating in the north and north east of China, shows the severity of funding...

Daniel Tabbush

Jiangxi Bank IPO Preview: Strong Growth Offset by Weak Asset Quality

Jiangxi Bank, a Chinese city commercial bank, has filed a draft prospectus for a Hong Kong IPO. Jiangxi Bank has superior growth and profitability...

Arun George

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