Chinese Estates cuts its losses, heads for exit after 12 years as Evergrande's staunchest ally and second-largest shareholder

China Evergrande Group, initial public offering (IPO), real estate sales dwindled

China Evergrande Group’s second-largest shareholder Chinese Estates Holdings has dumped a major chunk of Evergrande shares at a loss and signalled the potential sale of its entire stake, as the staunchest ally that kept the world’s most indebted property developer afloat heads for the exit amid a debt crackdown.

Chinese Estates posted a loss of HK$1.38 billion (US$177.2 million) after selling 108.9 million Evergrande shares in the open market for HK$246.5 million, or HK$2.26 each on average from August 30 to September 21, according to a stock exchange filing. Evergrande’s shares changed hands at HK$3.42 on average during that period, according to Bloomberg's data.

The sole cornerstone investor in Evergrande’s November 2009 initial public offering (IPO), Chinese Estates held 751.09 million Evergrande shares, or 5.66 per cent of the Shenzhen-based developer, as of August 31, a stake which may be sold through block trades, or in one, or a series of transactions “depending on the prevailing market conditions,” according to its filing.

The disposal and possible exit by Chinese Estates, founded by the Hong Kong magnate Joseph Lau Luen-hung, is a significant bookmark in its ties with Evergrande’s chairman Hui Ka-yan, a relationship that spanned more than a decade. Chinese Estates has been either a buyer, or the seller, of every significant financial transaction by Evergrande since it went public 12 years ago.

China Evergrande Group, initial public offering (IPO), real estate sales dwindled

A billboard of Evergrande Real Estate Group at a construction site in the Jiangsu provincial city of Qidong, near Nantong, on 1 September 2012. Chinese Estates bought the project from Evergrande in June 2011 and then sold in 15 months later, booking a loss of HK$10.5 million. Photo: Imaginechina via AFP.

Chinese Estate bought US$50 million of Evergrande’s shares when Hui took the developer public in 2009, acting as the sole cornerstone investor in the offering.

Chinese Estates, then under the chairmanship of Lau’s son Lau Ming-wai, paid HK$13.59 billion to top up its Evergrande stakes in 2017 and 2018, picking up a total of 860 million Evergrande shares at an average price of HK$15.80 each, according to the filings. The average disposal price in August and this month was an 86 per cent discount to its purchase.

Lau and his wife Chan Hoi-wan are the highest-profile investors to be heading for the exit, as Evergrande grapples with finding cash to settle US$300 billion in liabilities. The company partially averted a default when it negotiated an “off-exchange” arrangement with bondholders to settle an interest payment on 4 billion yuan (US$619 million) of onshore bonds, estimated at 232 million yuan. The company has another US$83.5 million in interest payment due today in a dollar-denominated note.

China Evergrande Group, initial public offering (IPO), real estate sales dwindled

A map showing Chinese Evergrande Group’s projects at the Evergrande City Plaza in Beijing, on 22 September 2021. Photo: EPA-EFE

Chinese Estates, which owns several hotels, commercial property and residential complexes, has been relying on its portfolio investments for income, as real estate sales dwindled, receiving HK$156.5 million in first-half dividends from Evergrande.

The loss from its Evergrande disposal will tally up to a HK$10.86 billion loss in the year ending December 31, the company said.

The divestment of Evergrande shares was done due to “caution and concern about liquidity,” in case “the remedial measures said to have been taken and to be taken by Evergrande could not be effectively implemented,” Chinese Estates said.

China Evergrande Group, initial public offering (IPO), real estate sales dwindled

The China Evergrande Centre in Wan Chai, with a roof top billboard announcing the launch of Evergrande’s electric cars. Chinese Estates sold the 26-storey office tower, formerly called the Mass Mutual Tower, to Evergrande in 2015, but keeps its headquarters on the top floor. Photo: Edmond So

Evergrande’s shares jumped 32.2 per cent to an intraday high of HK$3, the biggest one-day jump in more than a year, on the prospect that the developer may negotiate its way out of a default. Chinese Estates jumped by 15.1 per cent to an intraday high of HK$2.51.

The Chinese government, anxious to prevent Envergrande’s collapse from saddling Chinese homebuyers with unfinished property, may step in to restructure and nationalise the developer, reported, citing unidentified sources close to the Chinese government.

“The news, if true, is very positive as it suggests that central government is aware of the high potential risk related to Evergrande’s bankruptcy and it needs to take immediate measures to contain all these risks,” said Raymond Cheng, head of research of Hong Kong and China at CGS-CIMB Securities. “Dragged [down] by Evergrande in the past few months, the share prices of China’s property and property management [stocks] were hit markedly. We expect the share prices in both sectors to see strong rebound in the near term.”

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