Evergrande’s staunchest allies drop out as Chinese real estate developers’ credit deteriorating due to debt problems

Two of property mogul Hui Ka-yan’s closest allies appear to be escaping from China Evergrande Group, selling much of the developer’s stock ahead of an emerging storm and deteriorating credit worth more than US$300 billion in liabilities.

Joseph Lau Luen-hung, the founder of the Hong Kong developer Chinese Estates Holdings Limited, and his wife Chan Hoi-wan, sold 138 million Evergrande shares several times in the past month for a total of about HK$500 million (US$64 million), according to the exchange filings. Lau and Chan have reduced their stake in the Shenzhen-based developer to 7.96 percent, second only to Hui’s majority 70.7 percent stake.

The pair’s sale followed an 85 percent drop in Evergrande’s share price and market value over the past year as the property developer struggles to find cash to pay off financial obligations estimated at US$300 billion.

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Any avenue of bank financing for Evergrande has been choked by the People’s Bank of China after the company, the world’s most indebted developer, blew through all three central bank’s “red line” debt relief last year. Spokespersons for Chinese Estates and Evergrande declined to comment.

China Evergrande Center in Wan Chai, overlooking Victoria Harbour. Chinese Estates Holdings, which sold the building to Evergrande in 2015, still occupies the top floor of the building. Photo: Edmond So. alt=China Evergrande Center in Wan Chai, overlooking Victoria Harbour. Chinese Estates Holdings, which sold the building to Evergrande in 2015, still occupies the top floor of the building. Photo: Edmond So.

In a friendship and alliance forged by weekly card games dating back more than a decadeAs a buyer or seller, Chinese Estates has been involved in almost every financial transaction by Evergrande since Hui launched his HK$6.5 billion real estate company in Hong Kong.

Lau was the cornerstone investor and subscriber to US$50 million of Evergrande’s shares during its IPO in 2009.

Hui Ka-yan, the chairman and largest shareholder of China Evergrande Group at the 2017 results briefing at the Four Seasons Hotel in Hong Kong on March 26, 2018. Photo: David Wong alt=Chairman and largest shareholder Hui Ka-yan of the China Evergrande Group at the 2017 Results Briefing at the Four Seasons Hotel in Hong Kong on March 26, 2018. Photo: David Wong

After Lau was convicted in absentia by a Macau court in 2014 of a bribe-for-land scheme, Evergrande dove in to buy Chinese Estates’ 26-story Mass Mutual Tower in Wan Chai for HK$12.5 billion, a price tag much higher than prevailing market valuations. The Chinese Estates headquarters remains on the top floor of the tower, renamed Evergrande Center in 2015.

In the same year, Chinese Estates sold some offices in Chengdu for HK$6.5 billion, and a residential real estate complex in Chongqing for HK$1.75 billion, all to Evergrande.

Lau and Chan aren’t the only allies heading for the exits, as Evergrande admitted in a statement that the “encountered unprecedented difficulties.”

Xia Haijun, vice chairman and chief executive of Evergrande since 2014, sold HK$115.6 million in shares in the developer’s electric car and property management division in August. Xia’s salary package, 57, was HK$275 million in 2018, making him the second-highest-paid executive among publicly traded companies in Hong Kong. Nothing but Tencent Holdings Martin Lau Chi-ping, president of Asia’s largest publicly traded company, earned more, according to the stock exchange reports.

SCMP graphics. alt=SCMP images.

Evergrande faces a major liquidity test next week when it must pay $83.5 million in interest on a dollar bill on Sept. 23, in addition to 232 million yuan ($36 million) for a renminbi bill, according to data collected by Bloomberg.

Nine bonds issued by Evergrande .’s flagship company with a face value of 53.5 billion yuan were placed on limited trading on the Shanghai and Shenzhen stock exchanges this week after a local credit agency downgraded their rating.

S&P piled up and downgraded Evergrande’s credit rating to “CC” junk status, implying that the company’s bonds are “very high risk,” not investment grade.

“Evergrande’s liquidity and access to finance is severely dwindling, as evidenced by an announced material drop in sales, a decline in cash balance and the continued use of physical properties to settle payments,” the S&P said. “The company may not be able to repay the debt on time, which will lead to a default scenario including the possibility of debt restructuring.” To add to the woes, HSBC, ICBC (Asia) and a host of other banks in Hong Kong have stopped approving mortgages to buyers of Evergrande’s Emerald Bay apartments in Tuen Mun, out of concern over the developer’s ability to complete its inaugural project in the city.

Last week, hundreds of investors and Evergrande employees staged a protest at the company’s headquarters in Shenzhen to demand repayment of investment products purchased from the company. The unusual event comes at a sensitive time for the Chinese authorities as they seek to prevent riots during the centenary of the ruling Communist Party.

Hui, also known as Xu Jiayin in mainland China, is a delegate to the Chinese People’s Political Consultative Conference (CPPCC), the advisory body to the legislature.

To placate angry staff and investors, Evergrande plans to offer discounted real estate products in lieu of cash, according to creditors who were made aware of an announcement slated for Sept. 20.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia in over a century. For more SCMP stories, explore the SCMP App or visit the SCMPs facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.