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Evergrande drops further after chairman steps down from key unit role

August 18, 2021

HONG KONG (BLOOMBERG) – China Evergrande Group’s shares and bonds slid for a second day after billionaire Hui Ka Yan stepped down as chairman of the company’s onshore real estate unit.

The move spooked investors already concerned about the company’s funding troubles, with Evergrande’s shares falling as much as 4.9 per cent in Hong Kong trading on Wednesday (Aug 18). Its 8.75 per cent US dollar bond due 2025 was down 0.7 cent on the dollar at 38.9 cents, as of 9.05am in Hong Kong, according to prices compiled by Bloomberg.

Investors are searching for any signs of upheaval at the world’s most indebted developer, which is selling assets to stave off a cash crunch. The Hengda Real Estate Development unit is core to the company’s property business, contributing about 88 per cent of group revenue last year.

Evergrande said the change of chairman at Hengda was normal after it scrapped plans for a backdoor listing of the unit late last year. But the timing did little to dispel speculation that a restructuring could be in the works requiring Hui to relinquish his grip on his empire.

“In a time when Evergrande needs to stabilise market sentiment, Hui’s role change will lead to more investor anxiety,” said partner Ma Dong, from Chinese local private bond fund BG Capital. “Management needs to give the market a good explanation to avoid further selling pressure on its bonds.”

The government has been pushing to curb Evergrande’s borrowing in the hopes of putting a stop to the notion that any company can be “too big to fail”. With more than US$300 billion (S$408.8 billion) of liabilities, Evergrande’s fate has broader implications for China’s US$50 trillion financial system and the nation’s banks, trusts and millions of home owners.

Mr Zhao Changlong was named to replace Mr Hui as chairman of Hengda, according to the website of the government-run National Enterprise Credit Information Publicity System, a corporate information platform not typically used for major company announcements. Mr Hui remains chairman of the overall group, which owns 63.5 per cent of Hengda.

Mr Zhao led Hengda before it sought an A-share listing. Mr Hui became the unit’s chairman in November 2017, after Hengda introduced 130 billion yuan (S$27.3 billion) from strategic investors with a clause that he shares repurchasing responsibility should the listing fail. The plan, which involved selling Hengda to a Shenzhen-listed shell company, was aborted last November.

Mr Hui’s departure from Hengda does not necessarily mean he will give up his role as group chairman, according to Bloomberg Intelligence analysts Patrick Wong and Lisa Zhou. “China Evergrande Group’s overall business management may not significantly change in the short term,” they wrote on Tuesday.

Others have been less optimistic. Analysts at PRC Macro wrote in an Aug 10 note that they think Evergrande is approaching a debt restructuring that could wipe out its existing shareholders and force significant haircuts on bond holders.

“We remain bearish on Evergrande’s ability to save itself and believe the developer has been abandoned by regulators,” noted the research.

Curbed by China’s Three Red Lines that determine whether companies can take on additional debt, Evergrande has been spinning off and selling assets. It has offered steep discounts and relied on so-called commercial bills as payments for suppliers to cut down on debt.

Evergrande raised about one billion yuan by selling part of its stake in regional lender Shengjing Bank to local state-owned enterprises, an exchange filing showed on Tuesday.

Evergrande’s woes escalated last year when it faced US$19 billion in payments if it failed to meet a promise to achieve the backdoor listing for its main property assets in China by the end of January. That sparked concern about cross defaults in its widely held debt securities, triggering fears of systemic risks.

The company skirted the crisis with the help of wealthy friends and the government. Strategic investors agreed to waive their right to force most of the repayments by the property firm, while the local government of Guangdong stepped in to help stabilise the situation, sources familiar with the matter said at the time.

Trouble began brewing again this year as Evergrande shrank its borrowings in line with demands from policymakers, while delaying payments to some suppliers who started to take their disputes over IOUs public. Some sought asset freezes. Evergrande’s bonds were also repeatedly downgraded by ratings agencies.

Guangdong has once again been called on to help, with the central government telling the authorities in the province to map out a plan to manage the developer’s debt, sources familiar with the matter said last week.

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