World's Most Indebted Developer Battles Short-Sellers Again (1)

(Bloomberg) -- The world’s most indebted developer is duking it out with short-sellers again.

China Evergrande Co. has spent HK$6.3 billion ($808 million) in a buyback spree since March 29, two days after short interest started climbing from a trough. Such battles between Evergrande and bearish investors have played out before -- and once more the developer is coming out on top.

The buybacks have helped propel Evergrande shares up 75 percent in Hong Kong this year, making it one of Asia’s top performers. That’s a timely development for the company ahead of a planned backdoor listing on the mainland, as higher share prices could translate into a better valuation in Shenzhen. How the short-sellers fare will largely depend on whether Evergrande, led by Chairman Hui Ka Yan, will be able to pull off future buybacks and a mainland listing.

“It’s a wrestling match,” said Francis Lun, Hong Kong-based chief executive officer of Geo Securities Ltd. Short-sellers will lose if Evergrande is able to list on the mainland after propping up prices, while bears will win if the company is unable to continue the buybacks, he said.

Bearish bets have risen from a four-year low of 8 percent of free float on March 27 to 14.57 percent as of April 25, according to IHS Markit Ltd data. Evergrande is the second-most shorted stock in the MSCI China Index after Fullshare Holdings Ltd, which tumbled on Tuesday after being was targeted by short-seller Glaucus Research Group.

Evergrande’s buyback pace since March 29 dwarfs a previous spree that started at the end of 2015 and accounts for about one-quarter of all the repurchases announced in Hong Kong this year. In an unusual move, Evergrande published an advertorial in a local newspaper on April 20, saying that the stock repurchases will increase the developer’s competitiveness and create more value for shareholders. The Guangdong-based developer is trading at about 2.4 times the latest book value, compared with the 1 times average for Chinese developers.

Record Prices

“From a valuation perspective, if Evergrande stops buying back shares, it will drop eventually,” said Toni Ho, an analyst at RHB OSK Securities Hong Kong Ltd.

The company’s Hong Kong-based officials didn’t return calls seeking comment.

Evergrande shares on April 25 jumped to the highest level since listing in November 2009, with trading volume more than five times the three-month daily average. They’ve since fallen from their record after declining in two straight trading sessions. The shares fell 3.7 percent at 2:02 p.m. on Thursday in Hong Kong.

Evergrande is seeking an A-share listing by injecting most of its mainland properties into Shenzhen Special Economic Zone Real Estate & Properties Group Co Ltd, with the deal price subject to regulators’ approvals. The chairman of Evergrande’s peer Guangzhou R&F Properties Company Ltd has said that regulators have signaled such listings will be done at similar valuations to their shares trading in Hong Kong, according to Patrick Wong, an analyst at Bloomberg Intelligence.

“Now that its Hong Kong-traded shares are treading increasingly closer and to the valuation implied in the first round of strategic investment for A-share listing, a further rally is not sustainable,” said Danielle Wang, a Hong Kong-based property analyst at DBS Vickers Hong Kong Ltd.

Evergrande’s buybacks are diverting cash away from its stated goal of lowering leverage. The company’s net gearing, including perpetual notes, surged to more than 700 percent at the end of last year, and finance costs soared, prompting management to pledge that it will make an effort to lower debt.

Hong Kong’s public float requirements may also restrain further buybacks by Evergrande. Once the recently repurchased shares have been canceled, the chairman’s stake in the company will increase to about 78 percent, according to Bloomberg calculations based on stock exchange filings.

Hong Kong-listed companies typically need to have at least 25 percent of their stock available for the public, but the bourse may accept a lower percentage of between 15 percent to 25 percent at its discretion if the stock had a market valuation of more than HK$10 billion at listing, according to Hong Kong exchange’s rules. Evergrande’s market cap was HK$53.35 billion at its initial public offering, according to data compiled by Bloomberg.

Evergrande may hit its buyback limit “soon,” JPMorgan Chase & Co. analyst Ryan Li wrote in a note published Wednesday. Evergrande had applied for an exemption when it listed in Hong Kong and its public float requirement is 22.04 percent, Li wrote.

(Updates with share prices in the third, ninth paragraphs.)

--With assistance from Emma Dong and Fox Hu

To contact the reporters on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net, Lisa Pham in Hong Kong at lpham14@bloomberg.net, Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Richard Frost at rfrost4@bloomberg.net, Sree Vidya Bhaktavatsalam

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