Evergrande Needs the China Referee's Whistle

(Bloomberg Gadfly) -- Time is running out on China Evergrande Group's plan to buy its way back home at a much higher valuation. After spending HK$6.29 billion ($808 million) repurchasing shares on nine occasions since March 29, the world's most indebted developer has almost reached the threshold at which it can do no more.

Hong Kong stock exchange rules require a minimum proportion of shares, usually 25 percent, to be freely available to trade and not held by a company's controlling interests. For Evergrande, that floor is 22.04 percent. As of the developer's most recent disclosed buyback on April 26, the so-called free float stood at 22.09 percent , a hair's breadth away from the limit, according to the estimate of Bloomberg Intelligence analyst Kristy Hung.

The free-float restriction could have a significant bearing on Guangzhou-based Evergrande's goal of moving its listing from Hong Kong to an exchange in mainland China. The developer, with $48 billion of net debt as of Dec. 31, has been one of Asia's best-performing large-company stocks this year, rising 72 percent as home sales rebounded in China.

Gains accelerated after the buybacks started on March 29, with the shares rising about a third between that date and their peak on April 25. The latest transaction and the nearing of the constraint on further repurchases coincided with an 11 percent, two-day slump that was the stock's biggest reversal in 15 months.

Evergrande has a strong interest in maintaining a buoyant valuation. The developer plans to gain a so-called backdoor listing in China, where stocks trade at higher multiples of earnings, by injecting almost all of its property assets into a Shenzhen-traded company. The potential catch is that Chinese regulators require companies transferring from Hong Kong to relist at a similar valuation, according to Bloomberg Intelligence's Hung.

A year ago, Evergrande shares traded at a multiple of less than 7 times reported earnings. As of Friday's close, they were on a ratio of 19.8, a valuation expansion driven by a combination of lower profit and this year's share rally. Its price-to-book ratio has climbed to 2.3 from as low as 1.09 in June. The Shenzhen Composite Index, meanwhile, trades on a P/E of 28, with the real estate sub-index on a multiple of 17.

Now would be an opportune moment for Evergrande to make the switch to China. The difficulty is that the company must wait for approval from mainland regulators, and there's no indication of when that will be forthcoming. As Gadfly noted last month, it's not alone in seeking to list over the border, and may find itself behind rivals such as  Dalian Wanda Commercial Properties Co. and  Guangzhou R&F Properties Co. in the queue.

Time is of the essence. Evergrande shares soared this year even as the company was targeted by short-sellers. The stock was the second-most shorted in the MSCI China Index as of last week after Fullshare Holdings Ltd., the Chinese developer that's the subject of an attack by Glaucus Research Group.

There's little doubt that the buybacks have helped support the stock. With that prop removed, Evergrande looks vulnerable.

As the owner of China's top football club, Evergrande's billionaire founder Hui Ka Yan knows that winning for almost the entire game means nothing if the contest is lost in the final minutes: It's the score at the final whistle that counts. That whistle can't come soon enough.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

1. Assumes cancellation of the repurchased shares.

   To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

   To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.

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