Evergrande is in trouble and investors are unhappy

Wealthy investors who supported Chinese billionaire Hui Ka Yan’s empire are now paying a heavy price amid growing concern the group will struggle to repay its debts.

Hui had long been able to count on his poker pals to back China Evergrande Group during times of trouble, whether it was by buying stakes in his company, loading up on its bonds or not calling in debts. He broadened that circle to raise funds for his property services business in December, as well as an electric-vehicle start-up in January. 

The sharp reversal in shares of Evergrande and its units means Hui’s friends are now facing potentially punishing losses. The developer’s shares have tumbled about 70% in 2021, while Evergrande Property Services is 34% below its initial public offering price.

Strategic investors who spent a combined $3.4bn buying shares in China Evergrande New Energy Vehicle Group in its January placement have seen the value of their investments plunge more than 70%. They’ve been unable to sell due to a lock-up agreement. Evergrande sold another $1.4bn of the shares in the open market in May to undisclosed investors.

Concern the company will need to sell assets at a steep discount is fuelling declines in its listed subsidiaries. The world’s most indebted developer has total liabilities of $300bn.

Here’s a look at how some Evergrande investors are doing now:

NEV unit

Back in January, Hui sold HK$26bn ($3.4bn) of stock in Evergrande’s green car unit to six investors, subject to a 12-month lock-up period. The placement, which came amid a global craze for electric vehicle makers and surging equity markets, helped trigger a more than 50% rally in the shares the day after the news.

Property Services IPO

Evergrande’s property management arm raised HK$14.3 billion in its Hong Kong IPO in November, pricing in the lower half of its marketed range. The offering included a staggering 23 cornerstone investors. While these investors were allowed to sell after June 2, other stakeholders will be locked up until December 2.

Three of the strategic investors in the NEV placement were also anchor investors in the property services unit, according to filings and term sheets seen by Bloomberg. Chinese Estates’ Chan was the biggest backer of the prelisting funding round, subscribing to 5% of the shares, while Kingkey bought HK$236m. Centralcon Group’s controlling founder made a HK$200m investment.

Poker pals

Some of Hui’s closest allies are from a group with whom he shares a fondness for a Chinese poker game. Known as the Big Two Club for the game’s name, the clan includes Chinese Estates’ Lau, New World Development’s Henry Cheng and C C Land’s Cheung Chung Kiu. They have done numerous transactions over the years and are so interconnected that any default by Evergrande would have repercussions for their businesses.

Suning fallout

Billionaire Zhang Jindong lost control of the retail arm of his Suning empire when it received a state-backed bailout in July. Concern over his group’s cash flow flared in September, when Zhang waived his right to a 20-billion yuan payment from Evergrande. The decision helped his friend Hui save his own company but made little financial sense to investors. 

Shenzhen support

It’s not just wealthy individuals feeling the pain. Shenzhen Investment, a listed property developer controlled by the Shenzhen government, said the value of its Hengda Real Estate Group fell about HK$833m in the first half. As of June 30, the stake was worth about 4% of its total assets, according to a statement to the Hong Kong stock exchange. 

Bond buyer

Asia Orient Holdings, led by secretive tycoon Poon Jing, disclosed in July it amassed Evergrande bonds with a face value of $1bn, according to an exchange filing, including bonds it bought for $230m over the past year. At the time of the announcement, Poon’s company and its affiliates were sitting on unrealised losses on disclosed holdings, given Evergrande bonds traded near record lows, according to data compiled by Bloomberg.

Bloomberg News. More stories like this are available on bloomberg.com