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Double the pleasure

4 Oct 2016 By Pete Sweeney, Kathy Gao

China Evergrande Group’s backdoor listing plays Hong Kong off against Shenzhen. The geared-up developer wants to effectively list most of its property assets on the mainland, seeking a way to tap China’s higher valuations.

Evergrande proposes to inject the bulk of its mainland property assets into smaller developer Shenzhen Real Estate in exchange for a controlling stake. It could also bring in strategic partners to invest as much as 30 billion yuan ($4.5 billion).

There are as yet few details, and this will require approval from a long list of regulators plus two sets of shareholders. JPMorgan analysts say Hong Kong authorities could object to the almost pure holding-company structure that would be left behind.

If done, though, moving onshore would put Evergrande in a market where valuations are often much higher than for offshore peers. Evergrande trades at about 0.6 times this year’s book value, according to Macquarie analysts, while Shenzhen Real Estate trades on 4.3 times trailing book value, according to Eikon.

What detail has emerged, though, includes some real oddities. Evergrande reckons the assets it is swapping will generate 280 billion yuan in revenue next year – where analysts’ consensus forecast for the parent company is just 214 billion yuan.

And the introduction of strategic investors suggests there could be a huge uplift in overall value. If they pay 30 billion yuan for a 15 percent stake, Credit Suisse notes, that would imply an overall market value of $30 billion. Evergrande’s own market capitalisation is $9 billion. Both data points suggest Evergrande is far, far more bullish than the wider market.

Strategically, at least, the deal has better logic than some of Evergrande’s wackier buys – like gatecrashing the battle for control for rival Vanke, or the pricey acquisition of another Shenzhen group, Calxon, earlier this year. Calxon also looked like preparation for a backdoor listing but presumably Shenzhen Real Estate means that option is no longer needed. Alongside the recent $405 million sale of Evergrande’s baffling sidelines in grain, dairy and spring water, this makes some sense.


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