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The billionaire poker club behind China's most indebted developer
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.
Mr 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' Joseph Lau, New World Development Co billionaire Henry Cheng and C C Land Holdings' Cheung Chung Kiu.
When Evergrande sold US$6 billion of bonds in January - just as parts of China's economy were preparing for the novel coronavirus lockdown - Mr Lau and his family bought US$1 billion, it was reported.
The purchases were part of at least US$16 billion of transactions among Big Two Club members over the past decade, a tally that ranges from stock investments to property contracts. The deals offer a glimpse into the ways in which China's social networks of influence, or guanxi, work among the nation's property titans.
While the relationships can be a source of strength in difficult times, the economic crisis unleashed by the virus is putting them to the test, said 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 (S$74.33 billion) of short-term debt maturing this year.
"It's expected these tycoons will lend their hand to Mr Hui because of their mutual interests," Prof Hu said. 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 Mr Lau's younger brother bought US$150 million of Evergrande bonds in January and a further US$170 million last month in the secondary market. 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 Mr Lau's wife to buy debt investments from Chinese Estates, including US$140 million of Evergrande securities. The deal was negotiated at arms length, said the filing.
In a sign of how closely the empires of Mr Hui and Mr Lau are intertwined, Chinese Estates said in its 2019 annual report that profit fell for the year largely due to its exposure to Evergrande. Shares of the Shenzhen-based developer, which have tumbled 35 per cent in the past 12 months, account for almost 40 per cent of Chinese Estates' assets. Mr Hui has attributed Evergrande's stock slide partly to the economic fallout from the pandemic, and partly to "unfair" media coverage of its recent profit warning.
Mr Hui hasn't shied away from ambitious expansion plans. He had pumped billions into designing and manufacturing electric cars. He also turned Guangzhou Evergrande into one of China's most popular football clubs since buying it in 2010, floating plans for a new stadium that may include a giant lotus-shaped design. (He sold a 50 per cent stake in the club to Jack Ma in 2014.)
As the Covid-19 outbreak intensified this year, Mr Hui showed his ambitions extend into the realm of science. He gave roughly US$115 million to Harvard Medical School, its affiliated hospitals and the Guangzhou Institute of Respiratory Diseases.
The tycoon, who has a US$22.3 billion net worth according to the Bloomberg Billionaires Index, grew up poor but became one of China's first university students after the end of Mao Zedong's Cultural Revolution.
Mr Hui has long ensured that 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.
Encouraged by the prospect of Deng Xiaoping's economic reforms, Mr 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 three trillion yuan in total assets and 800 billion yuan in annual sales. The group's 2019 sales were 601 billion yuan.
In March, Mr Hui cited the Chinese government's firm stance against housing speculation for his pledge to curb Evergrande's debt-fuelled 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 per cent 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, its liabilities nudged higher even as it lowered its debt-to-equity ratio by increasing equity.
Part of Evergrande's challenge, according to Prof Lai, is that much of its borrowing for shorter-term debt comes from non-bank lenders. So-called shadow loans accounted for almost one-third of Evergrande's total borrowings in 2019, and it pledged a record US$49 billion of assets to guarantee shadow debt that year. Evergrande's short-term debt maturing this year amounts to 47 per cent 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, he said, adding that the firm does not 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 US$1.6 billion bond that matured in March.
Evergrande's transactions with Mr Lau date back to at least 2009, when the tycoon bought shares in Evergrande's initial public offering. Mr Lau's family and associated entities later invested billions in 2017 as Evergrande's shares rocketed 458 per cent that year, gains that have since largely been erased.
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.
Evergrande's contracted sales grew 23 per cent in the first quarter, but some analysts have noted the gain was fuelled 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 per cent.
The bond market is similarly sceptical. While Evergrande's US$200 million of 8 per cent dollar notes maturing in June trade near par, its 8.75 per cent US-currency notes due 2025 fetch only 79.8 US cents on the dollar and fell as low as 54.6 US cents in March, during a broad selloff 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. "If the coronavirus maintains its presence in China, Evergrande's problems will only increase." BLOOMBERG