Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The Background
A bit more a year ago, I looked at the situation of Evergrande (3333 HK) as it faced what would become a funding squeeze in Evergrande May Be Facing a Funding Squeeze. It has, indeed, faced such a funding squeeze. 
I wrote at the time that the implementation of the Three Red Lines pilot program (setting limits on bank borrowings and debt by developers: a liabilities-to-assets ratio (excluding pre-sales) of no more than 70%; a net debt-to-equity ratio of less than 100%; and cash holdings at least equal to short-term debt for a dozen major real estate developers) risked a quantum change in the state of the real estate market and economy. My warning:



I also wrote...

To be clear, this is not a story of criminal embezzlement as much as it is a story of wealth-building during times when people are relaxed, trusting, and money is plentiful. And it is possible that we are now on the cusp of a Moment - a time when the bezzle is discovered. Banks are being told not to lend more. Companies are being told not to borrow more. And off-balance sheet liabilities are making their way onto the front pages.
The rate of discovery is increasing.

Indeed, the discovery rate increased and regulators pressured banks to not increase real estate exposure, and not lend to developers - even those not part of the "pilot programme."
And the discovery rate increased on Evergrande when market observers noted that when the plan to inject Hengda into Shenzhen-listed Shenzhen Special Economic Zone Real Estate &amp; Properties Group Co. Ltd was not realised by end January 2021, it would require Hengda to spend some $20-22bn buying back the minority shares. This was a real scare because the documents and their terms were reasonably public (and the deadline had been extended) and there was a Letter Asking For Help to the local government, variously denied by Evergrande in a Solemn Declaration that the letter was pure fabrication, and re-asserted by media (which claimed to have seen it). In early November, the plans to merge Hengda with SSEZRE&amp;P were terminated and shareholder agreement amendments by those minority shareholders to not seek redemption at end-January were signed or in the works. In the end, Hengda only had to repay "principal" of RMB 4.3bn, and the remaining RMB 125.7bn held 40% of Hengda Real Estate (up from 36-odd percent before), which would indicate the "non-principal" portion of the buyback guarantee was worth something like 10% and was turned into shares rather than Suning.com (002024 CH) had owned RMB 20bn and had been most forthright in saying it would ask for its money back, as it was facing problems, and in the end, it too agreed.

That may have been the straw which broke the camel's back as the company required a restructuring earlier this year which saw Suning founder-tycoon Zhang Jindong give up half his stake and step down as chairman (the company may still be in negotiations to repay a $600mm debt put-able on the change in control - a bondholder solicitation requiring 90% approval to agree to changes was launched in August but holders of 25% were said to be demanding their money).

In the end, I said that significant asset sales and gross deleveraging were the only avenues to save the company from its impressive debt and payables obligations over the next 12-18 months. 
Not long after, Evergrande tried to sell some equity, but was only partly successful (discussed in Evergrande Equity Placement - Musical Shares). The shares did not react well, and fell further, leading the cash-strapped company to actually buy back its own shares, discussed in Evergrande Equity De-Placement: Musical Shares), apparently to boost the price. Evergrande then listed Evergrande Property Services (6666 HK), then bought shares of EPS in the market, then bought more in the market, then eventually sold some at a lower price. And Evergrande bought more shares in Evergrande Auto (708 HK), then sold more at a lower price. It sold shares in its unit Fangchebao ("FCB") in March, on its way to a presumed IPO, but these too were backed by a "buyback guarantee" (effectively loans with shares as collateral). And Evergrande's own shares neared the HK$11 mark in early June, the company bought back its own shares for a few days before giving up on the effort.
Since then, I have discussed the company's situation a few more times (the Special Dividend, and Losing Room to Manoeuvre). And the most recent piece in August (Evergrande as a Study of Quantum Mechanics Theory) investigated the near-philosophical issue of how to think about the state of the company. The situation has become a bit more dire since then. 
Nearly 13 months ago when the company made a wholly unsolicited "Announcement on the Operation of the Company" after its Solemn Declaration, it noted, 

In the 24 years since the establishment of the Company, the Company has borrowed loans across 20,523 transactions. There has never been any late payment of interest nor overdue repayment of principal.

Counting trust loans which apparently did not get repaid in August, WMPs not paid in September, bank interest which did not get paid in September, and several USD bonds which did not see their coupons paid on 23 and 29 September, or their principal repaid in October, this is no longer the case. 
The company is in virtual default. Hengda Real Estate owes trust interest and trust principal payments, bank loan interest, or at least some of it. It may owe CNY bond interest, but may have done a deal with bond investors on a CNY bond which had a coupon due 23 September. There have been issues with Wealth Management Product (WMPs) and their repayment, and Evergrande's initial proposals to repay investors have not been received well. Work on half the company's 800 projects across China have halted and the company has not repaid commercial acceptance bills to contractors and suppliers. Evergrande did not pay global investors on 23 September for two bonds which had USD coupons fall, and those bonds and others since have a 30-day grace period before the bondholders can call a default. Evergrande and unit Tianji Holding apparently were also the guarantors for a US$260mm bond issued by a non-consolidated Hengda joint venture called Jumbo Fortune Enterprises Limited which came due on 3 October. That was a Sunday so the effective repayment date was the next day, but apparently there was no grace period attached to this bond which means default may be called at any time. There has been no news on this and it was a privately-placed bond so we cannot know how this turns out until the bondholders, the company, or those later in charge choose to tell us.
On 14 September, the company issued an "update" where it said, 

The month of September is typically when real estate companies in China record higher contract sales of properties. However, the ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group. The Company expects significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cashflow and liquidity.

The company noted in that filing that asset monetisation had not come as expected - and negotiations to sell stakes in two listed companies, and to sell the HQ headquarters were nowhere, that subsidiaries had failed to repay WMPs, and said it had engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited as financial advisors. Houlihan Lokey, is of course, known for its bankruptcy/default work. 
Law firm Kirkland and Ellis and investment bank Moelis are apparently working on behalf of holders of US$5bn of face value of Evergrande USD bonds and initiated contact prior to 23 Sep, but as of a week ago, there had been "no meaningful contact." 
On 29 September, the PBOC got the financial regulators, MOHURD, and the top 24 banks together to make it clear to lenders they needed to "accurately grasp and enforce the prudential management system of real estate finance around the goal of ‘stabilizing land prices, house prices and expectations'". Bloomberg said, "The regulators asked banks to refrain from cutting off funding to developers all at once, according to a person familiar with the matter. Lenders should continue supporting projects under construction and approve mortgages for buyers of homes that are qualified for pre-sales."
New Developments


Late Friday (15 October), Reuters reported that Guangzhou SASAC Yuexiu Property (123 HK) had withdrawn from negotiations to buy the Hong Kong headquarters of Evergrande in Wan Chai. The story was that the Board feared "unresolved indebtedness would create potential complications in completing the transaction smoothly" (which is code for 'Evergrande's likely bankruptcy will mean questions over an over-hurried sale - if it is "too cheap" it might be undone in restructuring proceedings, and if it is "too expensive" then Yuexiu might be accused of a shadow bailout of banks which have lent money to Evergrande with the building as security (and as the central government and financial authorities have been urging a "market-oriented approach" to the resolution of Evergrande's debt issues.

This is not surprising. It was apparent at the end of August that the municipal government had told Yuexiu to halt the deal while it was combing through the developer's books. The news Friday should not have been a surprise whatsoever.
Given the HK$10+bn of securitised loans against the HK$12.5bn Evergrande purchase price and rumoured HK$13+bn sale price, Evergrande and/or Hengda (the ultimate owner may be either because they were switched at one point, without much announcement) will end up with minimal net cash from the sale.



On Friday 15 October, the PBOC held a press conference with Zou Lan, director general of the Financial Market Department of the PBOC, who stated "risks to the financial system stemming from the developer’s struggles are controllable” and "unlikely to spread." A Bloomberg article noted he said the PBOC had asked lenders to keep credit to the real estate sector “stable and orderly.” He reiterated that property would not be used as a short-term boost to the economy, and mortgage restrictions had helped curtail an excessive surge in property prices. He also said that property investment has slumped recently after some developers faced credit problems, but that this was a normal market phenomenon. 

Regarding Evergrande, he said, “In recent years, [Evergrande] failed to manage its business well and to operate prudently amid changing market conditions... Instead it blindly expanded and diversified.” The developer’s rapid expansion “led to severe worsening of its financial metrics, and risks blew up in the end.” 
When a financial regulator says “risks blew up in the end” or calls that “the final outbreak of risks” (depending on one's translation) that tells you they know this is the end for Evergrande, but the press conference clearly contrasted Evergrande and “some developers” with most developers which have 'healthy financial performance'. To me, the press conference was remarkable in that it seemed to be an effort to ring-fence risks. 
I note his highly market-conciliatory statements about policy support for the real estate market within the bounds of “reasonable” price. Importantly, he said that some lenders had “misunderstandings” about macro-prudential policy (the Three Red Lines) which had caused strains for some developers, as some new projects were unable to get loans even as older projects repaid existing loans. He said “This short-term extreme reaction is a normal market phenomenon.” He noted that in some cities property prices surged too quickly, causing mortgage approvals and issuance to be limited, but that “once housing prices stabilise, the supply and demand of mortgages in those cities will be normalised too.”



This tells you that banks are being urged to make sure already-started projects are able to go through to completion (but it also tells you banks will be urged to make sure adequate developer collateral is kept in the cash pre-sales accounts so that banks don't take a hit). 
This is a follow-on from the Yi Gang-led meeting on 29 September. 

He also said Evergrande had been urged to continue asset disposals and restart stalled projects, and that regulators would ensure such projects had adequate support to continue.
I note that PBOC head Yi Gang was on a virtual conference call Sunday with the Group of 30 according to Bloomberg and said similar things to what Zou Lan said Friday. 

Also on Friday 15 October, an essay by China's leader Xi Jinping was published in Qiushi, which is the leading journal of theory for the Chinese Communist Party, published twice a month by the Central Committee and the Central Party School. This can be thought of as enormously important. The subject, of course, was “Common Prosperity.” The bulk of the essay dealt with topics which have been emphasised before - increasing equality of opportunity, regardless of current income or location, increasing support for less developed regions, increasing the level of education of the “skilled workforce”, increasing the level, reach, and equality of public services and fiscal spending, and other points. The sections to which readers might pay close attention are the following:

The Fourth Section, which says China should strengthen the regulation and adjustment of high income, crack down on illicit income, study methods to encourage ways to avoid excessive income, and “actively and steadily promote real estate tax legislation and reform, and do a good job of pilot work.” This may translate to a near-term expansion of a property tax system, as has been trialed in Shanghai and Chongqing for high-end residences since 2011. Reuters reported that China Property News (managed by MOHURD) quoted Jia Kang, ex-director of the finance ministry-backed Chinese Academy of Fiscal Sciences as saying, “China could consider conducting system innovations to expand the scope of property tax while moving forward with tax legislation as soon as possible,” and suggested it could start soon in Zhejiang. The 2021-2025 development plan released in March said it would push for property tax legislation in the next five years, but it is not on the current legislative agenda.
That section also talks about the necessity to “increase the management of income distribution in monopolistic industries and state-owned enterprises, rectify the order of income distribution, and clean up the chaos of distribution such as increasing the income of executives in the name of reform” which could suggest less pre-tax profit for SOEs through lower pricing. This could theoretically lead to increased payout ratios on lower profitability so disposable income goes further with lower prices on electricity, gas, and telecoms. One would think that this is tough given the current situation in energy, but this would be a vote against the capital gains potential of monopolistic SOEs.  
The Fifth comment was about promoting the common prosperity of people's spiritual life. This is, as far as I can tell, the goal of moving people's meaning of life away from the pursuit of monetary gain, and towards a kinder, gentler, socialist society. 
The Sixth comment talks about promoting the common prosperity of farmers and rural areas. This means spending more on rural and low-income areas. It means more subsidised housing and probably means more infrastructure, and subsidies for manufacturing buildout. 
The final bit notes that it would take until the middle part of this century for common prosperity to be basically achieved by all, and for the gap in income and consumption level (consumption ability level) to be reach a reasonable range. This is key. It will take 19-39 years to get there (assuming 2040-2060 is "the middle of this century"), and there are lots of caveats about how it will take hard work, and some people will achieve prosperity before others. “We must be down-to-earth and work for a long time, not everyone is rich at the same time, and not all regions reach a level of prosperity at the same time, different people not only achieve a high degree of prosperity, there will be time first and later, there will be some differences in the degree of prosperity in different regions, it is impossible to advance in parallel. This is a dynamic process of development, which must be continuously promoted to achieve results.”  The only way that works is for central authorities to guide rules and distribution forevermore. But we knew that. 


Also on Friday Evergrande's Hengda unit said (PDF, website) it would pay a coupon on the CNY October 2025 bond (149258.SZ) on 19 October. This got some upset that Evergrande was prioritising local bondholders to foreign bondholders. This is a bad take. The two issuers are separate. Bondholders of EVERRE bonds have access to 60% of the residual equity of Hengda, not to funds which pay bondholders. EVERRE bondholders, should, if anything, be happy that Hengda is paying its coupons, which means that Hengda's shareholders (i.e. EVERRE estate) are still "alive."
On Saturday, Reuters reported Evergrande CEO Xia Haijun had been in Hong Kong for two months dealing with investment banks and creditors on restructuring, and trying to accomplish asset sales. This had not been previously reported. That he has been here for two months and hasn't gotten any asset sales done tells you that they aren't happening easily.

These are the background items as we start the last week of non-defaulted Evergrande. Of course, the PBOC press conference is the only real new news. 
More discussion on what to do with that information below. 

Evergrande Update - Limited Contagion, and Positive Regulatory Noises Near-Term

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Thematic (Sector/Industry)

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, <a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/suning-com-co-ltd-a" target="_blank" data-smartkarma-citation="entities:9178:1" rel="noopener">Suning.com (002024 CH)</a>, <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a>, <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Global (DIDI US)</a>, <a href="https://www.smartkarma.com/entities/nio-inc" target="_blank" data-smartkarma-citation="entities:27399:1" rel="noopener">NIO Inc (NIO US)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1439927D CH)</a>, <a href="https://www.smartkarma.com/entities/reliance-industries-ltd" target="_blank" data-smartkarma-citation="entities:198:1" rel="noopener">Reliance Industries (RIL IN)</a>, <a href="https://www.smartkarma.com/entities/saudi-aramco" target="_blank" data-smartkarma-citation="entities:27317:1" rel="noopener">Saudi Aramco (ARAMCO AB)</a>, <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-health-international-inc" target="_blank" data-smartkarma-citation="entities:29677:1" rel="noopener">JD Health (6618 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-healthcare-and-technology-company-limited" target="_blank" data-smartkarma-citation="entities:27008:1" rel="noopener">Ping An Healthcare and Technology Company Limited (1833 HK)</a>

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:Tencent (700 HK), iQIYI Inc (IQ US), Alibaba Group (9988 HK), Suning.com (002024 CH), Trip.com (TCOM US), DiDi Global (DIDI US), NIO Inc (NIO US), ByteDance (1439927D CH), Reliance Industries (RIL IN), Saudi Aramco (ARAMCO AB), Alibaba Health Information Technology (241 HK), JD Health (6618 HK), Ping An Healthcare and Technology Company Limited (1833 HK) 

Global Emerging Markets Weekly: 20 August 2021

<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. 
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 <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. 
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>. 
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 <a href="https://www.smartkarma.com/insights/evergrande-equity-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity Placement - Musical Shares</a>).
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 <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. 
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. 
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. 
<h3>Yesterday, there was new news. </h3>
The company announced a board meeting for 27 July where the Board would consider a special dividend. 
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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 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?

HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Shenzhen International / Equity Bottom-Up

Share price of <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> (SZI) has been under pressure lately due to concerns on the proposed acquisition of <a href="https://www.smartkarma.com/entities/suning-com-co-ltd-a" target="_blank" data-smartkarma-citation="entities:9178:1" rel="noopener">Suning.com (002024 CH)</a> and weakened performance on its 49%-owned Shenzhen Airlines (SZA). However, now that it decided not to go ahead on Suning.com and there are signs of recovery at SZA, the still-depressed valuation (0.61x P/B, 5-year low) is unwarranted, in our opinion.Its core logistics segment performed well in 1H21, achieving higher occupancy which is supportive to rental income, and the expansion in project portfolio should be an added driver. The proposed acquisition of <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener">Shenzhen Investment Holdings Bay Area Development (737 HK)</a> by its subsidiary <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> should also generate good cash flow with upside from its land assets. Long-term, the transformation of South China Logistics Park may potentially create another successful story similar to its Qianhai project. At FY21F dividend yield of 8%, we believe SZI is very attractive at the current level.

Share price of Shenzhen Intl (152 HK) (SZI) has been under pressure lately due to concerns on the proposed acquisition of Suning.com (002024 CH) and weakened performance on its 49%-owned Shenzhen Airlines (SZA). However, now that it decided not to go ahead on Suning.com and there are signs of recovery at SZA, the still-depressed valuation (0.61x P/B, 5-year low) is unwarranted, in our opinion.Its core logistics segment performed well in 1H21, achieving higher occupancy which is supportive to rental income, and the expansion in project portfolio should be an added driver. The proposed acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) by its subsidiary Shenzhen Expressway Co H (548 HK) should also generate good cash flow with upside from its land assets. Long-term, the transformation of South China Logistics Park may potentially create another successful story similar to its Qianhai project. At FY21F dividend yield of 8%, we believe SZI is very attractive at the current level.

Shenzhen Intl (152 HK): What's Wrong Recently?

HK/China Healthcare Analyst (ex-Fosun Pharma)

Xinyao (Criss) Wang

Equity Capital Markets

Chengdu Quanyuantang Pharmacy Chain / Equity Capital Markets

Since the beginning of 2021, the boom of pharmaceutical e-commerce seems to be continuing. Some leading online pharmacies/retail pharmacies are heading for IPOs. On June 9th, 2021, the leading omni-channel smart retail pharmacy <a href="https://www.smartkarma.com/entities/chengdu-quanyuantang-pharmacy-chain-joint-stock-co-ltd" target="_blank" data-smartkarma-citation="entities:33478:1" rel="noopener">Chengdu Quanyuantang Pharmacy Chain (QPC HK)</a> submitted the listing application to the HKEX. As a representative of the innovative retail pharmacy in recent years, Quanyuantang held its ground under the "stress test" in the pandemic this year. Also because Quanyuantang is among the first batch of market participants launching online retail pharmacies in China, the news of its IPO caught the market's attention. So, how about this Company? This insight mainly analyzed the industry characteristics, the business, and the concerns of Quanyuantang.

Since the beginning of 2021, the boom of pharmaceutical e-commerce seems to be continuing. Some leading online pharmacies/retail pharmacies are heading for IPOs. On June 9th, 2021, the leading omni-channel smart retail pharmacy Chengdu Quanyuantang Pharmacy Chain (QPC HK) submitted the listing application to the HKEX. As a representative of the innovative retail pharmacy in recent years, Quanyuantang held its ground under the "stress test" in the pandemic this year. Also because Quanyuantang is among the first batch of market participants launching online retail pharmacies in China, the news of its IPO caught the market's attention. So, how about this Company? This insight mainly analyzed the industry characteristics, the business, and the concerns of Quanyuantang. 

Pre-IPO Quanyuantang Pharmacy Chain - Can Quanyuantang Find Its Own Place in the Fierce Competition?

China

Suning.com Co., Ltd. operates retail chain stores to sell household appliances, electronic products, office equipment, and communication products. The Company also provides installation and maintenance services.

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Suning.com (002024 CH)

Evergrande Update - Limited Contagion, and Positive Regulatory Noises Near-Term

An update on Evergrande, policy news, bond and equity index contribution, and commentary on the way things are viewed vs the way things are.

Travis Lundy

Global Emerging Markets Weekly: 20 August 2021

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity...

Wium Malan, CFA

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

Shenzhen Intl (152 HK): What's Wrong Recently?

SZI's depressed share price has already reflected the concerns of the market, with upside coming from good logistics segment, asset transformation...

Osbert Tang, CFA

Pre-IPO Quanyuantang Pharmacy Chain - Can Quanyuantang Find Its Own Place in the Fierce Competition?

This article mainly analyzed Quanyuantang in terms of the industry characteristics, the business, the comparison with peers, the concerns and the...

Xinyao (Criss) Wang

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