The world's most debt-laden property developer has seen the shares of its electric-vehicle spinout soar on Monday, after investors gave it a vote of confidence in a capital raising.
China Evergrande New Energy Vehicle Group (HK:0708) saw its Hong Kong-listed stock shoot up 60.7% by midday on Monday, ending the day with a 51.3% advance at HK$45.10. The company has just raised HK$26 billion (US$3.3 billion) by selling newly issued shares.
The market movement makes little sense. The electric car unit of the property developer China Evergrande Group (EGRNF) announced on Sunday it is selling 952.4 million new shares at the price of HK$27.30. That's a discount of 8.4% off Friday's close at HK$29.80.
So the shares should have fallen, since the offer undercuts current holders of the stock. However, it seems the high public profile of the six investors involved has acted as a signal for retail investors to buy the stock.
The electric vehicle company is now worth more, with a market capitalization of HK$399.8 billion (US$51.0 billion), than its parent company, since the developer's market cap is HK$222.7 billion (US$28.4 billion). Shares in the property developer, which is China's second-largest developer by sales and now owns 67.6% of the car company, rose 7.3% on Monday.
There's plenty that doesn't add up. China's state planning regulator, the National Development and Reform Commission, has asked local governments to investigate construction and production projects related to China Evergrande New Energy Vehicle as well as fellow electric car wannabe Baoneng Motor. It appears the regulators are looking at whether the companies, which both are linked to developers, used incentives to build electric car production facilities as a way to buy adjacent land on the cheap that they plan to use simply for normal housing.
The six buyers now represent 9.75% of the enlarged capital base. They include the founder and current chairman of the China Gas Holdings (CGHLY) utility, Liu Minghui, as well as Chan Hoi-wan, the wife of the property tycoon Joseph Lau.
Although he's a well-known billionaire in Hong Kong, Lau is a wanted criminal in Macau. He was convicted in 2014 of bribing the Macanese government's former head of public works so Lau's company could secure five plots of land next to Macau's airport. He was tried in absentia and sentenced to five years and three months in jail, a sentence he has never served. The man he bribed, Ao Man-long, is serving 29 years in prison.
Hong Kong and Macau have no extradition treaty, although they are both technically part of China. The former British and Portuguese colonies retain their own legal systems.
Lau subsequently stepped down as chairman of Chinese Estates Holdings (CESTF) , the developer he headed, although he put his son in charge and still retains the power behind the throne. Despite also transferring much of his wealth to his current wife and his son, he is nevertheless worth US$14.4 billion, Forbes estimates, mainly in Hong Kong real-estate holdings. He also owns an estimated US$1 billion in art, including pieces by Andy Warhol, Paul Gauguin and David Hockney.
A tycoon is still a tycoon, as wanted as he may be. So his tacit support has bolstered the image of the China Evergrande electric car company.
The other four investors are Cosmic Success Holdings (an investment company set up by Kingkey Group property tycoon Chen Hua); the Chinese hedge fund manager Greenwoods Global Investment; the Heyirong International Trade unit of private-equity investor Wang Kaiguo; and Upper World, owned by Centralcon property tycoon Wong Kwong-miu. They have all agreed on a one-year lockup.
The property company China Evergrande had US$110.6 billion in debt as of the end of 2020, more than any other developer in the world. Its shares took a beating in September when a letter became public in which the company begged the government of Guangdong Province to give the go-ahead for a backdoor listing it was attempting. If that didn't go ahead, the company, said, it would struggle to pay back the money people had already put up for the listing when it was first proposed in 2016.
I would not be putting my money in the China Evergrande electric car unit, even if I was a billionaire property tycoon. China Evergrande frequently follows the whims of its founder, Hui Ka-yan, by expanding into totally unrelated businesses such as bottled water. It also owns the Guangzhou Evergrande soccer team, which granted is one of the most successful in China, buying that in 2010 for C¥100 million (US$14.1 million). The soccer club is now called Guangzhou Evergrande Taobao FC, after Alibaba Group Holding (BABA) invested C¥1.2 billion (US$169 million) to become part-owner of the club. Taobao (or "Search for Treasure") is Alibaba's main e-commerce site.
That strange tie-up reportedly occurred because Alibaba entrepreneur Jack Ma and Evergrande's Hui bonded over drinks one night. The shift into noncore businesses is typical among Chinese companies, where there's little concept of focusing on a core competency or concentrating assets in the most productive line of work. Companies grow in happenstance ways that reflect the interests of the tycoon that runs them.
China Evergrande was founded by Hui in 1996 in Guangzhou. It now has its own mineral-water brand called Evergrande Spring, a chain of retirement homes featuring health clinics, a hot-springs water park, a boarding school with ties to the Real Madrid soccer club, and is building a "fairyland" theme park chain for kids.
Evergrande says it aims only to build the New Energy Vehicle Group into the "largest and most powerful new energy automobile group in the world in 3-5 years." It plans to make 14 models of cars under the Hengchi brand, and hopes to achieve annual sales of one million vehicles, although it has yet to enter proper commercial production. That is supposed to begin this year.
Last September, the car company raised HK$4 billion (US$510 million) in new funding from investors in a top-up placement. It actually began life as the retirement/health-clinic business, then suddenly changed tack to add the electric car business. The shift became official last August, when it changed its name from Evergrande Health Industry Group to China Evergrande New Energy Vehicle Group.
Investors who thought they owned a retirement-home property play with health-care features now owned, whether they wanted to or not, a car company with ambitions to build out a huge chain of charging stations.
The Shenzhen backdoor listing proposed in 2016 would have transferred most of the property developer's holdings into the Shenzhen company, leaving China Evergrande shareholders owning 82% of the Shenzhen company as well as all its unrelated businesses in areas like tourism, culture and online furniture sales.
Evergrande has mainly been building the car company by buying other alternative energy auto businesses, and licensing rights to technology. The company says it aims to spend C¥30 billion (US$4.2 billion) by the end of 2021 to build out its factories and acquire technology. It has six factories under various stages of construction.
The electric vehicle field is increasingly crowded in China, the world's largest market for such cars. U.S.-listed Nio (NIO) , Xpeng (XPEV) and Li Auto (LI) all saw huge run-ups in their share prices last year as investors grew enthusiastic about improving prospects and the boom in Tesla (TSLA) shares.
China Evergrande New Energy is vague about the use of the proceeds from the latest share offering. It says it will use the cash for research & development, production, to pay down debt, and for "general corporate purposes".
Whether that means making a bid for the Real Madrid soccer team or attempting to buy Coca-Cola (KO) , expanding the health clinics the company originally intended to build, or actually trying to build and sell cars, is anyone's guess.