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Shares in China Evergrande surged the most this year after the indebted real estate developer offered investors a rare respite by dangling the prospect of a surprise dividend payout.
Evergrande is one of China’s largest borrowing companies in international markets and is headed by magnate Hui Ka Yan, once China’s richest man.
The billionaire and his company have come under intense investor scrutiny over how Evergrande will meet Beijing’s demands for sweeping reductions in leverage in the real estate industry after years of fueled aggressive expansion by debt.
Shares of the Hong Kong-listed group fell nearly a third in the first half of the year, as they were also hit by tighter credit conditions in China and Beijing slowly pulls out of implied guarantees. supported by the state for conglomerates under pressure.
However, on Friday, the stock rose 14% to its highest level since the depths of the Covid-19 crisis early last year after Evergrande said in a statement to the Hong Stock Exchange. Kong that its board of directors would meet to discuss its first special dividend in three years.
The company could not immediately be reached for comment.
Investors see Evergrande’s takeover as closely tied to Hui’s success or failure to navigate the Chinese government’s ‘three red lines’, which were introduced almost a year ago in response to concerns regarding increases in house prices. The measures limit corporate borrowing according to three parameters: debt / cash, net debt / equity and debt / assets.
Evergrande suffered a frantic sell-off of its stocks and bonds last year due to plans to list shares in subsidiary Hengda Real Estate.
Investor confidence was further shaken last month after Fitch, the U.S. rating agency, downgraded the Chinese developer from B over to B for its long-term foreign currency ratings. Fitch said his first downgrade of Evergrande in five years reflected pressures both to downsize the company and reduce debt.
Still, Goldman Sachs analysts noted that management had plans to meet Beijing’s “red lines” by the end of 2022, six months ahead of the mid-2023 deadline. The plan is to reduce the debt to less than Rmb450bn by mid-2022, up from Rmb717bn at the end of last year.
“On the back of a cash inflow of Rmb653 billion from real estate sales in 2020… Evergrande has made positive progress towards deleveraging,†the analysts wrote.
Yet Goldman Sachs also highlighted the risks the company faces, including further increases in debt if Evergrande resumes aggressive expansion, the potential for faster-than-expected interest rate hikes and liquidity control by the Chinese government.
Additional reporting by Hudson Lockett in Hong Kong
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