Chinese property developer Evergrande Real Estate has agreed to acquire a further 17.28% stake in Shengjing Bank for Rmb10 billion ($1.5 billion), continuing its buying spree in the face of mounting debt.
Hong Kong-listed Evergrande said it would buy about 1 billion shares through a subsidiary from five domestic stockholders of Shengjing Bank, lifting its stake in the local commercial lender to 27.24%, according to a filing with the territory’s stock exchange on Thursday.
“The acquisition is expected to generate high investment [returns] and will prove to be a reasonable investment,” Hui Ka Yan, Evergrande's chairman, said in the filing.
Evergrande did not respond to emailed requests for further comment.
Evergrande, China’s second-largest developer by revenue after Vanke, plans to pay Rmb10 (HK$11.97) per share, representing a 8% premium over Shengjing Bank’s closing share price of HK$11.08 on Wednesday.
The transaction comes one month after the Guangzhou-based developer paid HK$3.9 billion for 5.59% of the bank.
“It’s mainly an equity investment. Investing in a bank doesn’t mean much to Evergrande’s business. I don’t think the deal will create synergies or real business between the two companies,” Kevin Leung, director of global investment strategy at Haitong International Securities, told FinanceAsia.
Established in 1996 by Hui, one of China’s richest men, Evergrande soon developed into a major player in the domestic property market. In recent years, it has stepped out of its core real estate business to new sectors including banking, healthcare, and new energy.
Since the start of 2015 it has splurged $16 billion on assets at home and overseas, according to Dealogic data.
Last week it announced that it would pay Rmb3.6 billion to acquire a 52.78% stake in domestic developer China Calxon Group.
It is also actively buying financial assets. For instance, it bought Great Eastern Life Insurance (China) for Rmb3.9 billion ($600 million) last November and injected Rmb9 billion into the still loss-making insurer this month.
“Evergrande’s pursuit of debt-funded expansion to support its business growth has resulted in a high level of debt leverage. The capital injection will likely consume some of Evergrande’s cash on hand, which will in turn constrain its ability to control further debt growth,” Moody’s analysts said in a note on April 22.
The company’s total debt rose from $44 billion in 2013 to $95 billion last year, pushing up its net debt-to-equity ratio to 136% from 87% over the same period.
Nevertheless, the scale of the Shengjing Bank investment looks manageable, seeing as it accounts for just 6% of Evergrande’s cash-on-hand of Rmb158 billion (on an unaudited basis, as of end 2015).
Motives
According to Moody’s, Evergrande’s acquisitions of financial institutions offer limited strategic benefits to its core property business, apart from “potential indirect funding arrangements.”
Leung of Haitong International Securities agrees that becoming a big shareholder in Shengjing Bank could help the heavily indebted Evergrande with financing but thinks this might not be the company’s main rationale.
“They just keep spending money as they have a lot of cash but meanwhile a lot of debt too,” Leung said. "I don't think help on financing is the main reason as they have not shown much intention over the past few years to make their debt situation look any better."
According to him, Evergrande’s latest string of acquisitions could potentially be part of a plan to exit from Hong Kong for a relisting on the A-share market for a higher valuation.
“They want to buy more assets to expand the company’s asset base. If they do return to the A-share market, they could boost the valuation,” Leung said.
In late March, Dalian Wanda Group’s commercial property arm announced it was considering going-private just 15 months after it went public in Hong Kong through a $3.72 billion initial public offering.
“It will not be a surprise if Evergrande were to express its intention to privatise,” Oscar Choi, a property analyst at Citi Research, said in a note last week.
Shenyang, Liaoning province-based Shengjing Bank has a market capitalisation of $8.34 billion and runs both retail banking and funding operations in mainland China.
It was among the first batch of 15 domestic financial institutions to receive a consumer finance licence in January from the banking regulator.
