A former tabloid reporter married to a fugitive, poker-playing billionaire is among those backing the world’s most indebted property group’s bid to become a leader in electric cars, despite it not having sold a single vehicle.
Evergrande New Energy Vehicle’s Hong Kong-listed shares have risen 81 per cent this year, catapulting the Chinese group’s market capitalisation to more than $63bn — above that of traditional rivals such as Ford — even as it struggles to get its debut car to market.
But Evergrande NEV is not just another example of the mania for electric vehicles that has swept across global markets. The rally is tied to signs that influential backers will continue to stand by parent China Evergrande and its web of subsidiaries, even as it faces pressure from Beijing to bring its more than $120bn in borrowings under control.
“If this is not a bubble, I don’t know what is,” said David Blennerhassett, an analyst at Quiddity Advisors, of Evergrande NEV’s stock.
In late January, Evergrande NEV announced that a handful of individuals with connections to its parent and its chairman had bought $3.4bn of shares, pushing the stock price up by over 50 per cent in a single session.
Hui Ka Yan, who is also Evergrande’s majority owner, was previously China’s richest man. His personal connections extend to poker games with Hong Kong property tycoons such as Chinese Estates’ Joseph Lau, who in 2014 was convicted of bribery and money laundering in Macau. In January 2020, Lau invested in Evergrande’s issuance of dollar bonds, according to Hong Kong media.
For the January 2021 fundraising Evergrande NEV tapped Lau’s wife Chan Hoi-wan for $400m, according to a bourse statement. Chan is a former entertainment reporter at Apple Daily, a Hong Kong tabloid known for its pro-democracy stance. She also owns 2.4 per cent of Evergrande itself as of the end of June and was an investor in the group’s property services prior to its November stock market listing.
Other investors in the property business include a company linked to Cheung Chung-kiu, another of Hui’s poker opponents, who last year bought London’s most expensive home and who stepped in to buy Evergrande bonds when prices fell last September.
Representatives for Lau, Chan and Cheung did not respond to a request for comment.
Maggie Hu, an expert in finance and property at the Chinese University of Hong Kong, said Hong Kong tycoons “have formed strategic partnerships [with Evergrande] over the years and their business interests are closely linked and tightly knit together”.
Evergrande NEV represents the parent’s attempt to diversify as the Chinese property market slows, experts say.
“The problem with the Chinese property market is that prices have been too high, which has created a tremendous amount of risk for the economy . . . so they are looking for an additional growth driver,” said Liu Jing, a professor of accounting and finance at Hong Kong’s Cheung Kong Graduate School of Business.
The electric vehicle subsidiary, part of a sprawling network of businesses that includes China’s largest football club, was known as Evergrande Health before being rebranded in August.
But Evergrande NEV is primarily focused on property development, believes Nigel Stevenson, an analyst at research firm GMT Research. He cites cash flow statements of the electric vehicle subsidiary that demonstrate high levels of continuing investment in property, only part of which is for factories.
Lines of credit flowing from the parent to its electric vehicle subsidiary have raised questions among analysts over what money the latter raises will be used for, at a time when Evergrande has been selling assets to raise cash.
The parent’s stock and bonds sold off in September following reports it had sought support from the provincial government in China’s Guangdong, where Evergrande is based. The company has denied the reports.
A share placement by Evergrande in October raised just $555m, versus a target of over $1bn, while its access to bank funding is limited by rules unveiled at the end of December.
“Under this tough external financing environment, it is harder for Evergrande to obtain debt financing from banks in China,” said CUHK’s Hu. “To raise more funds and to alleviate its current leverage situation, funds could be raised by Evergrande from its subsidiaries.”
Evergrande NEV has said the money raised in January would be used to help realise its goal of becoming “the world’s largest and most powerful new energy vehicle group” but added that it would also help to “repay indebtedness”. In a separate statement, the company said “most” of the proceeds would be used for research and development, as well as base construction.
Financial statements show that Evergrande NEV owed Rmb34bn ($5.3bn) to Evergrande as of June. A further Rmb31bn of borrowing is guaranteed by its parent, meaning that debt reduction at the subsidiary level would improve the group’s balance sheet. A proposed listing of Evergrande NEV shares in mainland China could raise further capital to alleviate the parent’s debt.
Some investors appear to be holding out hope that Evergrande NEV can realise its electric vehicle ambitions. A rally in the shares in February was triggered by the release of online videos showing its pre-production models being test driven. But others maintain the business’s prospects have more to do with its parent than any technological breakthrough.
“As it currently stands, Evergrande NEV essentially looks like a funding vehicle to upstream the proceeds to the parent,” said Blennerhassett. But the money raised by Evergrande NEV “is just a drop in the ocean for how much Evergrande Group is exposed to”.
Additional reporting by Nicolle Liu in Hong Kong