The Billionaire Poker Club Behind China’s Most Indebted Developer

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As billionaire Hui Ka Yan steers China’s most indebted real estate company through the worst economic slump in decades, he’s getting support from some familiar faces: his fellow property tycoons.

Hui’s China Evergrande Group has been increasing financial ties with real estate empires run by three other Chinese magnates, according to company filings and media reports. Known locally as the Big Two Club because of their fondness for a Chinese poker game of the same name, the group includes Chinese Estates Holdings Ltd.’s Joseph Lau, New World Development Co. billionaire Henry Cheng and C C Land Holdings Ltd.’s Cheung Chung Kiu.

When Evergrande sold $6 billion of bonds in January — just as parts of China’s economy were preparing for coronavirus lockdown — Lau and his family bought $1 billion, Hong Kong’s Sing Tao Daily newspaper reported, without citing a source. The purchases were part of at least $16 billion of transactions among Big Two Club members tracked by Bloomberg over the past decade, a tally that includes everything from stock investments to property contracts.

The deals offer a glimpse into the ways in which China’s social networks of influence, known as guanxi, work among the nation’s property titans. While the relationships can be a source of strength during difficult times, the economic crisis unleashed by the virus is putting them to the test, according to Maggie Hu, assistant professor of finance and real estate at The Chinese University of Hong Kong. Evergrande, which is rated four levels below investment grade by Moody’s Investors Service, has 372 billion yuan ($52.6 billion) of short-term debt maturing this year.

“It’s expected these tycoons will lend their hand to Hui because of their mutual interests,” Hu said. “Whether they can collectively tackle the current crisis without dragging themselves down isn’t known.”

Evergrande declined to comment, as did Lau and Cheung via requests sent to their companies. Cheng’s New World Development said in an emailed statement that it “conducts transactions only after thorough consideration to serve the best interests of our shareholders and the group.”

Underwriters of Evergrande’s January bond deal, which was private, declined to comment. But some details on who purchased the debt have emerged in exchange filings. They show a listed company chaired by Lau’s younger brother $150M BONDS ISSUED BY EVERGRANDE UNIT” class=”terminal-news-story” target=”_blank”>bought $150 million of Evergrande bonds in January and a further $170 million last month in the secondary market as part of cash management and treasury $170m of Evergrande’s Dollar Notes” class=”terminal-news-story” target=”_blank”>functions. The most-recent purchase was “fair and reasonable and on normal commercial terms,” according to one of the filings.

Days after Evergrande’s bond sale, a separate exchange filing disclosed a proposal for Lau’s wife to buy debt investments from Chinese Estates, including $140 million of Evergrande securities. The transaction was negotiated at arms length, according to the filing.

In a sign of how closely the empires of Hui and Lau are intertwined, Chinese Estates said in its 2019 annual report that profit Final Results for the Financial Year Ended” class=”terminal-news-story” target=”_blank”>fell for the year in large part due to the company’s exposure to Evergrande. Shares of the Shenzhen-based developer, which have tumbled 35% over the past 12 months, account for almost 40% of Chinese Estates’ assets.

Hui has attributed Evergrande’s stock slide partly to the economic fallout from the pandemic, and partly to “unfair” media coverage of Evergrande’s recent profit warning. The media didn’t reflect the full picture insomuch as that while earnings slid, Evergrande’s profit is still among the top three in the sector, he said during a March 31 briefing.

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While several of China’s highly leveraged tycoons floundered in recent years, Hui hasn’t shied away from ambitious expansion plans.

He’s pumped billions into designing and manufacturing electric cars, vowing as recently as March to take on Elon Musk and “become the largest and most powerful new energy automobile group in the world in three to five years.”

Hui has also turned Guangzhou Evergrande into one of China’s most popular soccer clubs since buying it in 2010, floating plans for a new stadium that may include a giant lotus-shaped design. (He sold a 50% stake in the club to fellow billionaire Jack Ma in 2014 in a deal that was negotiated over drinks.)

As the Covid-19 outbreak intensified this year, Hui showed his ambitions extend into the realm of science. He gave roughly $115 million to Harvard Medical School, its affiliated hospitals and the Guangzhou Institute of Respiratory Diseases.

The real estate tycoon, who has a $22.3 billion net worth according to the Bloomberg Billionaires Index, has faced adversity before. He grew up poor but became one of China’s first university students after the end of Mao Zedong’s Cultural Revolution.

“About poverty, I know it very well,” Hui said in a rare 2018 speech upon receiving a philanthropic award. “In school, all I ate was sweet potato and steamed bread. I really hoped I could leave the village and eat better.”

Hui has long ensured Evergrande’s strategy hews to President Xi Jinping’s policy priorities — from making China a global leader in renewable energy to winning the World Cup.

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Encouraged by the prospect of Deng Xiaoping’s economic reforms, Hui left his job at a state-owned steel firm in 1992 and began developing property in southern China. He carved out niches in cities that were overlooked by other big developers, helping to fill in the housing gap for the nation’s growing middle class, said Rose Lai, a professor of finance at the University of Macau.

On its website, Evergrande states that by the end of 2020, it will be one of the world’s top 100 companies because it should have 3 trillion yuan in total assets and 800 billion yuan in annual sales. The group’s 2019 sales were 601 billion yuan.

In March, Hui cited the Chinese government’s firm stance against housing speculation for his pledge to curb Evergrande’s debt-fueled expansion. After unveiling the company’s first fall in annual profit in four years, he said the company would cut total debt — currently 800 billion yuan — by 50% within three years.

While some analysts see a buying opportunity after Evergrande’s share-price slide, others have cast doubt on whether the firm can deliver. After a previous promise to pare leverage in mid-2017, the developer’s liabilities nudged higher even as it lowered its debt-to-equity ratio by increasing equity.

Part of Evergrande’s challenge, according to the University of Macau’s Lai, is that much of its borrowing for shorter-term debt comes from non-bank lenders, a common form of funding for companies in China that aren’t owned by the government.

So-called shadow loans accounted for almost one-third of Evergrande’s total borrowings in 2019, and the company pledged a record $49 billion of assets to guarantee shadow debt that year. Evergrande’s short-term debt maturing this year amounts to 47% of total borrowings and exceeds its 229 billion yuan cash position, according to the company’s 2019 annual report.

Evergrande President Xia Haijun said during the March 31 earnings briefing that a large portion of the company’s shadow loans were actually the debt of smaller companies whose real-estate projects Evergrande had acquired.

The level will “notably decline” when Evergrande sells the projects, Xia said, adding that the firm doesn’t have any dollar bond repayment pressures this year and has been able to refinance much more in the past than the amount that comes due in 2020. The company paid off a $1.6 billion bond that matured in March.

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Evergrande’s transactions with Lau date back to at least 2009, when the tycoon bought shares in Evergrande’s initial public offering. Lau’s family and associated entities later invested billions in 2017 as Evergrande’s shares rocketed 458% that year, gains that have since largely been erased.

“Lau and some of the other Hong Kong tycoons are funding channels for Evergrande or Hui for his business development,” said Edwin Fan, an analyst at Fitch Ratings Ltd.

Hui and Lau have also done real estate deals, with Evergrande buying a Hong Kong office tower from Chinese Estates in November 2015 for a record HK$12.5 billion ($1.6 billion). That followed two other mainland property purchases from Chinese Estates the same year, one of which prompted Moody’s to flag Evergrande’s “notable increase in short-term debt.” In Hong Kong, Chinese Estates leases several floors at China Evergrande Centre.

In one of their more recent transactions, Chinese Estates invested along with Evergrande in Shengjing Bank Co., a lender in China’s northeast province of Liaoning near the border with North Korea. Chinese Estates later sold the shares to Lau’s wife, who has since sold part of her stake.

Cheung and Cheng family entities also hold shares in the bank, filings show. Evergrande boosted its interest following a request from Chinese authorities who wanted to recapitalize the lender, according to people familiar with the matter.

Shengjing Bank said in a filing that the deal would enhance the bank’s capital adequacy ratios, which are “relatively low” compared to peers in China, while strengthening risk management and supporting future growth. The joint filing said Evergrande is “optimistic” about the future development of the bank.

Whether the Big Two Club’s investments pay off will depend largely on the paths of China’s economy and real estate market, both of which are still highly uncertain as the pandemic weighs on global demand.

$83 Billion Catch-Up Means More Price Cuts: React” class=”terminal-news-story” target=”_blank”>Read more: Evergrande’s $83 Billion Catch-Up Means More Price Cuts

Evergrande’s contracted sales grew 23% in the first quarter, but some analysts have noted the gain was fueled by discounts, get-out clauses for buyers and price-match promises, saying that any sales increase this year will come at the expense of margins. Contracted sales in April rose 11.6%.

The bond market is similarly skeptical. While Evergrande’s $200 million of 8% dollar notes maturing in June trade near par, its 8.75% U.S.-currency notes due 2025 fetch only 79.8 cents on the dollar and fell as low as 54.6 cents in March, during a broad sell-off in Chinese high-yield securities tied to the Covid-19 outbreak.

“Evergrande expanded during the good years and is now facing tremendous pressure to repay debt,” said Andrew Collier, managing director at Orient Capital Research Inc. “If coronavirus maintains its presence in China, Evergrande’s problems will only increase.”

— With assistance by Blake Schmidt, Emma Dong, Venus Feng, Pei Yi Mak, Jun Luo, Ina Zhou, and Adrian Leung

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