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Evergrande's staunchest allies drop out as Chinese property developer's creditworthiness deteriorates amid debt woes

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Two of the property magnate Hui Ka-yan's staunchest allies appear to be bailing out of China Evergrande Group, selling a large chunk of the developer's stock ahead of a gathering storm and deteriorating credit ratings over US$300 billion in liabilities.

Joseph Lau Luen-hung, the founder of 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 about HK$500 million (US$64 million) in total, according to exchange filings. Lau and Chan reduced their holdings in the Shenzhen-based developer to 7.96 per cent, second only to Hui's controlling stake of 70.7 per cent.

The couple's disposals followed an 85 per cent plunge in Evergrande's stock price and market value in the past year, as the property developer struggles to find cash to settle financial liabilities estimated at US$300 billion.

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Every avenue of bank financing for Evergrande has been choked off by the People's Bank of China after the company, the world's most indebted developer, blew through all three of the central bank's "red line" debt allowances last year. Spokespeople of Chinese Estates and Evergrande declined to comment.

China Evergrande Centre in Wan Chai, with a view of 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 Centre in Wan Chai, with a view of 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 through weekly card games going back more than a decade, Chinese Estates had been involved either as a buyer or the seller in almost every financial transaction by Evergrande since Hui listed his property company for HK$6.5 billion in Hong Kong.

Lau was the cornerstone investor and subscriber of US$50 million of Evergrande's shares during its 2009 initial public offering.

China Evergrande Group's chairman and largest shareholder Hui Ka-yan during the company's 2017 results briefing at the Four Seasons Hotel in Hong Kong on 26 March 2018. Photo: David Wong alt=China Evergrande Group's chairman and largest shareholder Hui Ka-yan during the company's 2017 results briefing at the Four Seasons Hotel in Hong Kong on 26 March 2018. Photo: David Wong

After Lau was convicted in 2014 in absentia by a Macau court of a bribes-for-land scheme, Evergrande swooped in to buy Chinese Estates' 26-storey Mass Mutual Tower in Wan Chai for HK$12.5 billion, a price tag that was much higher than prevailing market valuations. Chinese Estates' head office remains on the highest floor of the tower, renamed Evergrande Centre in 2015.

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

Lau and Chan are not the only allies to be heading for the exits, as Evergrande admitted in a statement that it had "encountered unprecedented difficulties."

Xia Haijun, vice-chairman and chief executive of Evergrande since 2014, sold HK$115.6 million of shares in the developer's electric car unit and property management arm in August. The pay package of Xia, 57, was HK$275 million in 2018, making him the second highest-paid executive among Hong Kong's publicly traded companies. Only Tencent Holdings' Martin Lau Chi-ping, president of Asia's largest public company, earned more, according to exchange filings.

SCMP Graphics. alt=SCMP Graphics.

Evergrande faces a key liquidity test next week when it is due to pay US$83.5 million in interest on September 23 for a dollar-denominated note, in addition to 232 million yuan (US$36 million) for a renminbi note, according to data compiled by Bloomberg.

Nine bonds issued by Evergrande's flagship company with 53.5 billion yuan in face value were placed on restricted trading on the Shanghai and Shenzhen exchanges this week, after a local credit agency slashed their rating.

S&P piled in, downgrading Evergrande's creditworthiness to the junk status of "CC", implying that the company's bonds are of "very high risk", non-investment grade.

"The liquidity and funding access of Evergrande are shrinking severely, as shown by an announced material drop in sales, a fall in the cash balance, and the continued use of physical properties to settle payments," S&P said. "The company may not be able to service debt in time, which will lead to a default scenario including the possibility of debt restructuring." Adding to the woes, HSBC, ICBC (Asia) and a host of other banks in Hong Kong have stopped approving mortgage loans for buyers of Evergrande's Emerald Bay apartments in Tuen Mun, amid concern about the developer's ability to complete its inaugural project in the city.

Last week, hundreds of investors and Evergrande staff staged a protest at the company's Shenzhen head office to demand refunds of investment products that they bought from the company. The unusual event comes at a sensitive time for China's authorities, as they are anxious to avoid civil disturbances 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 have been informed about an announcement scheduled for September 20.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's 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.