Evergrande’s Aggressive Share Buybacks Fail to Impress

(Bloomberg) -- China Evergrande Group's latest round of share buybacks is falling flat with investors, even after the embattled developer snapped up shares at a premium and took major steps to avert a debt crisis.

The Chinese real estate firm resumed its buyback spree in the final quarter of 2020, spending HK$1.3 billion ($168 million) to buy shares for as much as HK$17.48 a piece. The buyback has done little to shore up the stock, which closed at HK$14.28 in Hong Kong Thursday. Falling for a second day on Friday, the shares are down 13% since the last buyback on Dec. 2, compared with a 4.3% gain in the benchmark Hong Kong index.

The muted reaction from investors underscores the challenges that remain for Evergrande, which faces new sector restrictions on borrowings as it tries to slash a debt pile that soared to $120 billion in June. The urgent need to pay off debt may also force the company to put property sales and cash flow ahead of earnings, according to Bloomberg Intelligence.

“The buybacks may not ease investor concerns” given its need to prioritize debt reduction, Bloomberg Intelligence analyst Kristy Hung said in a research note. “Weakness in profitability and long-term growth could still weigh on sentiment.”

Evergrande didn't reply to a request for comment.

The massive buybacks -- often at a premium -- have raised eyebrows among investors, given Evergrande's pressing need to preserve cash to pay off debt.

While most brokerages execute trading orders at or close to volume-weighted average prices to prevent the market from sniffing out big buyers, Evergrande often did the opposite. Between late October and early December, the developer repurchased shares as much as 3.7% higher than the average price, according to Bloomberg calculations based on company data. That's the widest premium for its stock repurchases since at least 2016, calculations show.

In another bizarre twist, Evergrande began buying shares two weeks after it sold $555 million of new stock to help reduce its debt pile, negating some of the benefits from the capital raise.

The developer, controlled by billionaire Hui Ka Yan, sold shares at HK$16.50 apiece in mid-October. Less than a month later, it started buying them back at an average cost that was higher, including a purchase at HK$16.71 a share on Nov. 9. Capital spent on the latest round of buybacks was equal to almost a third of the money raised from the share sale, according to Bloomberg calculations.

“Selling shares to investors at a lower price, then buying shares back at a higher price just weeks after that seems to be a highly irregular capital strategy for a company,” said Travis Lundy, a special situations analyst who publishes on Smartkarma. “Doing so suggests the company is conducting capital activities for reasons which are not strictly fundamental.”

Before the share sale, Evergrande had almost run out of fuel to propel the shares higher. After a HK$3.2 billion buyback spree in May and June, the free float of shares trading at Evergrande sat at 22.16%, close to the minimum of 22.04% set by the Hong Kong Stock Exchange, according to calculations. Its remaining quota for buybacks was estimated to be 20 million shares, equivalent to just three trading days based on the average share purchase at the time.

While the stock hasn't rallied since the buybacks, Evergrande's bonds are recovering after the firm made progress on cutting debt, raised $1.84 billion from a spin off of its property services arm and was thrown a $4.6 billion lifeline from state-owned firms.

A key bond of the world's most-indebted developer hit a four-month high this week, raising the likelihood of its return to the offshore debt market. Evergrande's most actively traded dollar note has erased all its losses since September after recovering from a crisis of investor confidence.

Evergrande reduced borrowings by 158 billion yuan ($24 billion) in the last three quarters of 2020. The developer aims to cut another 150 billion yuan of debt, and set a record annual sales target of 750 billion yuan for 2021.

With assistance from Bloomberg