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Most Read: Evergrande Real Estate Group, Taiwan Stock Exchange Weighted Index, Prodia and more

In today’s briefing:

  • Evergrande’s Very Special… Special Dividend?
  • Taiwan: TWSE & Margin Balance at New Highs
  • Smartkarma Webinar | Overweight and Underweight in Indonesia Amidst the Covid Crisis
  • Asia Shorts: Cosco Ship, Kuaishou, Pop Mart, WuXi, Takeda, Kirin, Monex, HMM, NC Soft, Yang Ming
  • China Growth Outlook: Facing Headwinds, While Exchange Rate Relief Depends on Fed Policy Changes

Evergrande’s Very Special… Special Dividend?

By Travis Lundy

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 ~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 HSD to 10+% interest rates are used to carry 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 wasn’t necessary. The shares popped 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. Yes, 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. 

Taiwan: TWSE & Margin Balance at New Highs

By Brian Freitas

The Taiwan Stock Exchange Weighted Index (TWSE INDEX) is 17.5% higher from its lows a couple of months ago. The margin balance is also at a new high and has risen by nearly US$3bn over the last 2 months.

At the same time, short notional has increased by US$3.7bn. Of the increase, only US$470m has come from new shorts being created while the rest is a result of higher stock prices.

The Taiwan Stock Exchange Weighted Index (TWSE INDEX) is one of the best performing Asian markets over the last year and could be susceptible to a pullback. The sharp increase in margin balance could lead to an equally sharp unwind that could lead to a repeat of the forced selling in May.

With geo-political tensions and the COVID19 variants still around, plus the higher margin balances, we would look to reduce long positions in Taiwan or put appropriate hedges in place to cushion the impact of a sharp selloff in markets.

Smartkarma Webinar | Overweight and Underweight in Indonesia Amidst the Covid Crisis

By Smartkarma Research

For our next Webinar, we have the pleasure of welcoming Insight Provider Henry Soediarko to explore overweight and underweight in Indonesia. The country’s healthcare system has been overwhelmed due to COVID-19, raising questions about hospital operators such as Mitra Keluarga Karyasehat Tbk (MIKA IJ) and Siloam International Hospital (SILO IJ), while tighter testing and vaccination regulations could bode well for Prodia (PRDA IJ) as the only listed entity in Indonesia with expertise on testing.

The webinar will be hosted on Wednesday, 21 July 2021, 17:00 SGT/HKT.

Henry Soediarko is a Long & Short Investment Ideas generator for Asian Equities with 10 years of experience in a Hedge fund focused on bottom-up ideas, searching out mispriced ideas and misunderstood investment theses. He provides on-the-ground insights in various Asian markets with a sway towards ASEAN. 

Asia Shorts: Cosco Ship, Kuaishou, Pop Mart, WuXi, Takeda, Kirin, Monex, HMM, NC Soft, Yang Ming

By Brian Freitas

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.

Hong Kong saw shorts rise on COSCO Shipping Holdings (1919 HK), Alibaba Group (9988 HK), China Merchants Bank H (3968 HK), Kuaishou Technology (1024 HK) and China Life Insurance Co H (2628 HK) while there was short covering on BYD (1211 HK), Weimob Inc. (2013 HK), WuXi AppTec Co. Ltd. (2359 HK), Pop Mart International Group Limited (9992 HK) and Country Garden Services Holdings (6098 HK). Shorts increased in the Financials, Industrials, Communication Services, Consumer Discretionary, Health Care, Consumer Staples and Real Estate sectors, while decreasing in the Information Technology sector.

In Japan, stocks increased on Takeda Pharmaceutical (4502 JP), Ryohin Keikaku (7453 JP), SBI Holdings (8473 JP), Tokyo Electric Power Co (9501 JP) and RENOVA Inc (9519 JP) while there was short covering on Kirin Holdings (2503 JP), Rakuten Inc (4755 JP), AGC Inc (5201 JP), Monex Group Inc (8698 JP) and Shimizu Corp (1803 JP). Shorts increased in the Health Care, Utilities and  Information Technology sectors while decreasing in the Consumer Staples, Industrials and Consumer Discretionary sectors.

China Growth Outlook: Facing Headwinds, While Exchange Rate Relief Depends on Fed Policy Changes

By Said Desaque

The economic recovery in China is being hamstrung by efforts to quell outbreaks of the Delta variant of the COVID-19 virus, while Chinese vaccine efficacy against the strain is unknown due to the lack of data. Notably, the commercially important province of Guangdong has been impacted by the Delta variant and has prompted calls for supportive policy measures to be undertaken to support the economy.

The People’s Bank of China (PBoC) has recently reduced the required reserve ratio (RRR) for banks, but it is unclear whether lending standards to small and medium-sized businesses will be significantly eased. Reducing the RRR has not been viewed as a harbinger for wider credit easing via lower interest rates, but the PBoC and the Fed could eventually be heading in different policy directions.

Fluctuations in the yuan-dollar exchange rate have been associated with shifts in US financial conditions, notably dollar appreciation has been synonymous with lower degrees of financial accommodation. Private capital outflows from China are repressed via taxation and, consequently, national economic interests play the dominant role in determining the size of Chinese monetary spillovers into US financial markets.

The US currency appears to have bottomed in early-June, but the Fed’s response to rising inflationary expectations could be critical for the dollar, as well as offering potentially China some assistance via a weaker yuan. Historically, the starting point of dollar appreciation versus the yuan, particularly when trading above 6.7, has had a major influence on its impact on US financial conditions, thereby suggesting that trading current levels offer the Fed a limited buffer zone.   

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