Chinese Estates Holdings soared after the family of Hong Kong tycoon Joseph Lau Luen-hung offered to take the property developer private, giving the stock a HK$1.77 billion (US$227.8 million) boost in market value.
The shares jumped 32 per cent to HK$3.83 as of 3.20pm in one of its biggest rallies since a 60 per cent surge in June 2020. They added to a 2.8 per cent advance last month, halting a six-month rout partly because of its soured investment in debt-laden China Evergrande Group.
Lau's spouse Chan Hoi-wan offered to buy 25 per cent of the company from minority investors at HK$4 per share, or 83.5 per cent premium to its last-traded price before the privatisation announcement late Wednesday. The offer will cost HK$1.9 billion and value the entire company at HK$7.63 billion.
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Lau and Chan currently control 75 per cent of Chinese Estates directly, through trusts held for their children and through other family members, according to the stock exchange filing.
The privatisation offer came two weeks after the group decided to dump all its interest in Evergrande as the Chinese home builder teeters on the brink of collapse under more than US$300 billion of liabilities. The decision could spell the end of business ties between the two tycoons forged over several large-scale transactions in the past 12 years.
The directors are cautious and concerned about the recent development of Evergrande including its liquidity and going concern, it said. "With issues (especially liquidity issues) surrounding the real estate sector, in particular Evergrande, the prices of these securities have declined substantially in 2021."
Chinese Estates derived most of its earnings from investment dividends, having sold as few as one property annually in recent years. That investment income shrank to HK$530 million in the first half from HK$1.72 billion a year earlier while its assets devalued.
"For Chinese Estates' privatisation, its book value per share was HK$13 which means the current share price is at a huge discount," said Will Shum, portfolio management director in Hong Kong at iFast Financial. "I t's still a good deal to do."
The company sold 108.9 million shares in Evergrande for HK$246.5 million between August 30 and September 21 and another block of 168.8 million shares on September 23 for HK$442.7 million, according to Wednesday's filing. They are expected to generate a combined loss of HK$3.45 billion.
The company said it expects to sell its remaining 4.4 per cent stake in Evergrande in the future, without specifying the timeline. Assuming a sale based on Evergrande's last-traded price of HK$2.95, the company would incur about HK$7 billion of loss against its book value, it added.
Declines in the market prices of its investments have since eroded the value of its investment assets to HK$13.8 billion on June 30 from HK$16.3 billion at the end of 2020.
More from South China Morning Post:
- Hong Kong stocks jump by most in 7 weeks as Alibaba, tech index rebound while Chinese Estates soars on privatisation bid
- Burned by Evergrande losses, Hong Kong tycoon offers to take developer Chinese Estates private for US$245 million
- Chinese Estates cuts losses, heads for exit after 12 years as Evergrande's biggest ally and second-largest shareholder
- China debt: Evergrande's magnate Hui Ka-yan and Chinese Estates' founder Joseph Lau through the years