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Property

China Evergrande spinoff's market debut falls flat in Hong Kong

Property Services unit drops below offering price after $1.8bn IPO

Demand for shares in Evergrande Property Services was relatively subdued, with the retail portion of the IPO garnering bids equal to just 10.7 times the shares on offer.    © Reuters

HONG KONG -- The market debut of Evergrande Property Services fell flat on Wednesday, underscoring investor nervousness over the health of its parent company, Asia's biggest private-sector debtor.

Shares of the property management unit opened at HK$8.84, up from an issue price of HK$8.80, but then dipped as low as HK$8.54 before closing at HK$8.78. The Hang Seng Index edged 0.1% lower.

With borrowings of $125 billion, China Evergrande Group is looking to slash its debt in half by 2022 by raising capital and selling new apartments at discounts of up to 30%. The company has struggled, however, with its debt target, with net borrowings nudging up in the first half of 2020.

"There is a palpable nervousness among investors when it comes to Evergrande," said a person involved in the Property Services transaction. "While the property management arm is among the best out there, investors are still concerned about the parent's ability to slash debt quickly."

Chinese developers have been rushing to sell shares in their property management units to raise capital to help meet a new set of regulatory benchmarks known as the "three red lines." These benchmarks, set to come into effect in the new year, limit each company's debt-to-asset ratio to 70% and cap debt-to-equity at 100%.

Some 16 Chinese property managers have raised $8.5 billion via initial public offerings on Hong Kong and mainland markets this year.

China Resources Mixc Lifestyle, a unit of a state-owned conglomerate, on Tuesday priced its Hong Kong offering at HK$22.30, the top of the shares' marketed range, putting it on track to raise $1.58 billion. Jiayuan International Group also is now marketing shares in spinoff Jiayuan Services Holdings.

China Evergrande raised $3 billion in August by selling shares of Evergrande Property Services in a pre-IPO tranche to investors, including a fund run by Chinese brokerage firm Huatai Securities and the Chinese arm of U.S. investment fund Sequoia Capital.

The public offering, however, met with lukewarm response in the market, with the retail portion garnering bids equal to 10.7 times the shares on offer and the institutional sale bringing in orders for 3.9 times the shares available, well below average demand for a Hong Kong IPO.

Evergrande Group stands to gross HK$7.1 billion ($915.86 million) before fees, after selling 810.81 million shares of Evergrande Property Services in the IPO. This will leave the group with a 59% stake in the unit. The other half of the IPO involved newly issued stock whose sale will bolster the capital of the management company.

Evergrande Group recently raised about HK$4 billion for its Hong Kong-listed electric vehicle unit, which is seeking an additional listing on Shanghai's STAR Market. In October, Evergrande Group itself struggled to sell additional shares in Hong Kong as it attempted to shore up its balance sheet. It raised $555 million, far short of its target of $1.09 billion, even after discounting the stock at 14.7% to its previous closing price.

In November, the company managed to stave off a looming cash crunch as it reached a deal to postpone repayments to investors that were poised to come due in January. Most of the investors, who held 130 billion yuan ($19.77 billion) in convertible debt issued by Evergrande's Hengda Real Estate unit, have agreed to convert their holdings into stock in the subsidiary.

China's property sector accounted for 28.7% of the $24.4 trillion in outstanding yuan loans issued by the nation's banks during the second quarter. That figure does not include financing offered by the country's large shadow banking sector.

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