Evergrande plunges on collateral curb

Finance | Victor Zhong and Bloomberg 27 Jul 2021

Embattled mainland developer China Evergrande (3333) and its subsidiaries plunged yesterday after local media said some banks and brokers stopped providing securities margin services to investors in those shares.

The Hongkong and Shanghai Banking Corporation and Chief Group have removed China Evergrande from the eligible stock list for securities margin trading. However, HSBC's clients can still use the stock of Evergrande Property (6666) as collateral, with a margin ratio of 30 percent.

Also, Bright Smart Securities & Commodities (1428) has lowered the lending ratio to zero.

Evergrande's shares fell 7.6 percent to HK$6.71. The developer's 8.75 percent bond due 2025, one of the firm's most widely traded dollar notes, continued to drop 1.5 US cents (11.7 HK cents) to 51.7 cents.

This came as the group mulls a special dividend to revive confidence in its tumbling stock; analysts are gaming out several scenarios that could have markedly different implications for equity and bond investors.

Chairman Hui Ka Yan, who directly or indirectly controls three-quarters of outstanding Evergrande shares, will meet with the company's board today to decide on the payout.

The last time Evergrande rewarded shareholders with a special dividend was in 2018. It has since seen annual drops in profit for 2019 and 2020, with total liabilities swelling to US$301 billion (HK$2.3 trillion).

"Evergrande may be using the dividend plan to emphasize the stability of its cash flow and profitability, especially after the recent debt pressure," said Yan Yuejin, research director at Shanghai-based E-house China Research and Development Institute.

Analysts reckon Evergrande will take one of three routes: a cash dividend, a stock dividend or handing out shares in its higher-value listed subsidiaries.

A cash dividend would be controversial given its share holding pattern and the dire need to pay down debt. Even so, Evergrande could justify it by pointing to a first half of record sales and cash inflows.

Apart from Hui, who owns almost 77 percent of the outstanding stock through companies controlled either by him or his wife, others who stand to benefit include Hong Kong billionaire Joseph Lau Luen-hung.



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