Shares in China Evergrande jumped by the most this year after the debt-laden property developer offered a rare reprieve to investors by dangling the prospect of a surprise dividend payment.
Evergrande is one of China’s biggest corporate borrowers on international markets and is helmed by tycoon Hui Ka Yan, once China’s richest man.
The billionaire and his company have been under immense investor scrutiny over how Evergrande will meet requirements by Beijing for sweeping leverage reductions across the property sector after years of aggressive debt-fuelled expansion.
The Hong Kong-listed group’s shares fell by almost a third in the first half of the year when they were also hit by tightening credit conditions in China and signs Beijing is slowly stepping back from implicit state-backed guarantees for under-pressure conglomerates.
However, on Friday the stock rose as much as 14 per cent to its highest point since the depths of the Covid-19 crisis early last year after Evergrande said in a statement to the Hong Kong stock exchange that its board would meet to discuss its first special dividend in three years.
The company could not immediately be reached for comment.
Investors view Evergrande’s recovery as being closely pegged to Hui’s success or failure in navigating the Chinese government’s “three red lines”, which were introduced almost a year ago in response to concerns over house price increases. The measures limit companies’ borrowing across three metrics: debt-to-cash, net debt-to-equity and debt-to-assets.
Evergrande suffered a frantic sell-off in its stock and bonds last year linked to a plan to list shares in subsidiary Hengda Real Estate.
Investor confidence was further dented last month after Fitch, the US rating agency, downgraded the Chinese developer from B plus to B for its long-term foreign currency ratings. Fitch said its first downgrade on Evergrande in five years reflected pressures to both downsize the company and reduce its debt.
Still, Goldman Sachs analysts noted that management had set out plans for meeting Beijing’s “red lines” by the end of 2022, six months ahead of a mid-2023 deadline. The plan involves cutting debt to below Rmb450bn by the middle of 2022, from Rmb717bn at the end of last year.
“On the back of a Rmb653bn cash inflow from property sales in 2020 . . . Evergrande has made some positive progress toward deleveraging,” the analysts wrote.
Yet Goldman Sachs also highlighted risks facing the company including further debt increases if Evergrande resumes aggressive expansion, the potential for faster-than-expected interest rate increases and liquidity controls by the Chinese government.
Additional reporting by Hudson Lockett in Hong Kong