Evergrande- From Glory to Grass.
The real estate company saddled with more than $300 billion in liabilities.
Evergrande, a Chinese property development company, is battling survival as there are concerns about its ability to fulfill its long-term obligations. A company founded by Xu Jianyin in 1996 in Guangzhou, China. The business objective was to develop properties for middle and top-income earners. As at 2021, it was ranked 122nd on the Fortune Global 500. Fortune Global 500 is the annual ranking of the top 500 corporations in the World by total revenue. According to CNN reports, Real estate — and related industries — account for as much as 30% of Chinese GDP. Explained: 5 things to know about the Evergrande debt crisis | CNN Business
A business listed on the Hong Kong Stock Exchange boasts to have owned more than 1300 projects in more than 280 cities with more than 200,000 employees. Outside real estate, the company was involved in electric vehicles, sports, and theme parks. It even owns a food and beverage business, selling bottled water, groceries, dairy products, and other goods across China. If you are a big fan of football, you must have seen the company’s label on the Guangzhou Evergrande football club. A football team they bought in 2010 for $185m.
What led to the massive borrowings
It is popularly said, “not to put all your eggs in one basket”. However, over-diversification is a grievous sin that comes with large consequences if not managed properly. Evergrande’s aggressive ambition to be the leading company in different segments and industries led to liquidity troubles. The company had issued bonds in Yuan and Dollars with cumulative interest in excess of $315m. For a company that made 507 billion Yuan in 2020, its liabilities were 4x the revenue. (Almost 2 trillion Yuan). The false idea of high growth and high demand created undue pressure for real estate companies in Chinese to leverage debts for property developments.
Evergrande, China’s second-biggest developer by sales in 2020, is the largest Chinese real estate developer by the issuance of offshore, U.S. dollar-denominated debt, which stood at $19 billion last year. The developer had a total of $300 billion in liabilities as of last year. -China Evergrande says contracted sales dropped 38.7% in 2021 (cnbc.com). The Chinese government has raised alarms on the increased borrowings in 2020 and had introduced a “Three red lines” rule. More than half of leading real estate companies did not comply including Evergrande. Despite the announcement to reduce its debts in March 2021, the company went ahead to launch 63 new projects in the first half of 2021.
In a statement released in August 2021, Evergrande warned it would default on its debt repayments if no additional capital was raised. In September 2021, the company missed out on its bond payment totaling $83.5m. On 17 December 2021, Evergrande was officially declared to be in default by S&P Global after missing a bond payment earlier in the month. On 3 January 2022, Evergrande shares were suspended from trading, without a reason being provided by the company. The company resulted to selling off some of its assets to pay the due interest.
The trouble expounded when regulators forced the demolition of one of its expensive projects in China. In January 2022, the company was ordered to demolish 39 buildings in a Chinese resort. Over $150m worth of assets were frozen by orders of the Courts. On 2 September 2022, a Hong Kong High Court judge rescheduled to 7 November 2022 legal proceedings to wind up China Evergrande Group to give the company time to formulate a restructuring plan. Evergrande to sell project in eastern China for $200 million | Reuters
Saddled with more than $300 billion in liabilities, Evergrande has been trying to sell its 26-storey China Evergrande Centre in Hong Kong. China Evergrande lenders appoint receiver to seize Hong Kong headquarters - sources | Reuters
In July, onshore bondholders, for the first time, reject Evergrande's proposal to postpone the repayment of a bond, worth 4.5 billion yuan. So far this year, the stock has lost 87%.
Key lessons:
1. Over-diversification is just not exposure to risks and returns, it’s also means diversification of funds. The revenue and cash generated in the early years were used to fund new projects in other industries. Since they have their funds tied to different projects, they had to borrow to fund their core project – property development.
2. The company’s aggressive ambition to take up different capital projects at the same time. Why will you launch 63 new debt-financed projects in the first half of 2021
3. Non-adherence to laws and regulations of the Chinese government. If they had adhered to the “Three red lines” rule, the damage would have been properly managed.
Sales are down. Construction on some projects has been halted over delayed payments and the company’s offices in China have been besieged for weeks by angry protesters, many of them employees, who worry they may not recover their investments in Evergrande properties and financial products. CNN reports that “Evergrande’s financial problems have been widely dubbed by Chinese media as “a huge black hole,” implying that no amount of money can resolve the issue.”
What do you think about this story? Is there a possibility of a comeback?
Cheer to a profitable lifestyle,
TL.
In summary, don't chew more than you can bite 😀
Hi Tosin, can you write about loans and how to make it work for you. I've heard people say that taking loans isn't always a bad thing, so what does one need to know before taking a loan.