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Evergrande Fights Short Sellers With $400 Million Asset Sale

Bloomberg logoBloomberg 6/22/2021 Bloomberg News

(Bloomberg) -- China Evergrande Group is giving short sellers a run for their money.

On a day when the developer sank to a four-year low, a long-standing supporter of billionaire founder Hui Ka Yan swooped in to buy a stake in one of his property units that could release almost $400 million for the debt-ridden conglomerate.

Shares in the world’s most indebted property developer surged 9% on Monday, the most since January, from the day’s low, squeezing investors who have heaped on bets against the firm.

The move to sell shares in a Hangzhou unit to a company controlled by Wang Zhongming, a repeated investor in Hui’s operations, is Evergrande’s latest effort to tap deep-pocketed friends for financial support. The firm might need to dispose of more assets to raise funds and meet so-called three red lines -- regulations to curb developers’ debt, Bloomberg Intelligence analysts led by Daniel Fan wrote in a note.

Key major assets that could be monetized include Evergrande’s tourism property, new electric vehicle, property services and the Fangchebao online sales platform, said Fan, adding that they could be worth more than 700 billion yuan ($108 billion).

“This once again shows the paramount important role Evergrande’s friends play in its business operations,” said Maggie Hu, assistant professor of real estate and finance at Chinese University of Hong Kong. “Evergrande always count on them for fighting against this kind of liquidity crisis.”

graphical user interface: Evergrande Listing Candidates © Bloomberg Evergrande Listing Candidates

Evergrande shares closed at HK$10.80 in Hong Kong, after earlier falling as much as 1.8% to the lowest since May 2017.

It plans to sell 29.9% of its stake in China Calxon Group Co. to a company controlled by Wang. The shares were valued at 2.5 billion yuan at the most recent close, according to data compiled by Bloomberg. Evergrande’s wholly owned unit Kailong Real Estate will hold 27.85% of the Hangzhou developer upon finalizing the deal, and will give up its voting rights in the remaining shares.

Multiple calls to Shenzhen Huajian went unanswered.

Wang, whose businesses span from real estate to agriculture and finance, has long been an investor in Evergrande businesses. The Calxon stake buyer, Shenzhen Huajian Holdings, was also a strategic investor of Evergrande’s onshore division known as Hengda Real Estate. The unit had planned to go public in China and later triggered a liquidity scare when it failed to do so.

Huajian put 5 billion yuan into Hengda in December 2016 as a first-round investor. Another firm backed by Wang invested 3.5 billion yuan in May 2017 as a second-round investor for the failed listing.

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Video: Evergrande Takes on Short Sellers (Bloomberg)

Wang’s Shenzhen Greenwoods Investment Group has 80 billion yuan in assets that include the mineral water, grain and oil businesses that were sold by Evergrande, its website shows. Greenwoods also invested 5 billion yuan in Evergrande’s electric-vehicle maker.

Evergrande’s liabilities including dollar bonds, bank loans and down payments from homebuyers swelled to 1.95 trillion yuan at the end of last year, about 77% of which were due within 12 months, according to its annual report. The firm plans to repay its $1.47 billion offshore bond maturing next Monday this week, Reuters reported Monday, citing an unidentified person.

Most of the property firm’s long-dated dollar bonds were slightly higher Tuesday morning. Its 10.5% dollar bond due April 2024 rose 0.1 cent to 79.3 cents after climbing 1.4 cents on Monday, the biggest gain in six months.

Evergrande’s affiliates also rallied Monday. Real estate management unit Evergrande Property Services Group Ltd. closed 7.3% higher, the biggest gain in a month. Internet unit HengTen Networks Group Ltd. gained 11%, the most in more than five weeks.

chart: Evergrande's three main listed companies bounce in Hong Kong © Bloomberg Evergrande's three main listed companies bounce in Hong Kong

Some investors are betting on a short-term rebound in Evergrande shares after they lost more than 40% from their January high, Castor Pang, head of research at Core Pacific Yamaichi, said by phone.

Short Interest

Short interest in Evergrande has surged threefold in three weeks. It reached 22.8% of the company’s free float as of Thursday, the highest level since September 2018, data compiled by IHS Markit and Bloomberg show.

There are so few Evergrande shares readily available that traders would need about 22 days to cover their bearish bets -- or buy back borrowed stock to close out an open short position. That increases the risk of a short squeeze, when hedge funds are forced to liquidate their positions at increasingly higher prices.

The developer has also resumed its favored tactic of repurchasing shares to force bearish speculators out of their positions. It spent about HK$529 million on buybacks since June 7, according to Bloomberg calculations.

Worries over Evergrande’s future have grown in recent weeks after affiliates missed payments and Caixin Media’s WeNews reported that regulators are looking into Evergrande’s ties to Shengjing Bank Co. in northern China.

The selloff worsened after WeNews reported last week that a local government discussed with Evergrande about paring its stake in Shengjing Bank, and the banking watchdog said it would curb a key source of financing for developers to control risk.

“Evergrande may buy time with a combination of rollover, new investment, and capital market access,” said Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong. “Friendly investment from white knight pals of the chairman have helped in the past, but ultimately won’t save the company.”

(Updates with assistant professor’s comment in the sixth paragraph, updates bonds in 14th)

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