What is Evergrande? Evergrande’s entire business has been built on China’s rising property bubble fuelled by debt from state banks, and bondholders.
With government policy pushing Evergrande into the spotlight is it too late for the countries most indebted developer, and what does the impending credit crunch mean for the global economy?
What is Evergrande Group?
The Evergrande Group is a Chinese holdings company best known for property development. The group sells apartments to upper and middle-income customers. The group has a diversified series of businesses that operate across eight different industries. The sheer size makes them China’s second-biggest developer and Evergrande alone accounts for 2% of China’s GDP
Evergrande’s massive scale of operations has landed them 122nd on the Fortune 500 Global list. Currently, the total assets of Evergrande Group have reached RMB 2.3 trillion (355.6 Billion USD), and the group has annual sales exceeded RMB 700 billion (108.25 Billion USD). This makes them 122nd largest in terms of revenue in the world.
The Group has transformed from a real estate developer to a conglomerate featuring “diversified business & digital technology” and will gradually spin-off its high-quality assets for listing.Evergrande
Evergrande is a significant portion of the Chinese Real Estate Sector, comprising 1.13% of the total market cap.
The Rise and Fall of China’s Real Estate
The Chinese Real Estate market has been unrivaled over the past decade, reaching new heights and delivering a breathtaking 98% Annualised average growth rate since 1997.
The China property boom has been encouraged by fiscal policy and catalyzed by relaxed lending and ghost town constructions.
We have seen developers borrowing billions creating ghost towns of apartments, supported by the bank’s constant lending and the government’s relaxed lending policies.
About 30% of Chinese households may not be able to service their debt if they have no income for one monthDavid Wang, head of China economics at Credit Suisse
China’s slowing economy amidst the COVID recession has pushed the crisis into the light as more and more borrowers defaulting on their loans. As a result of China’s ever-inflating property bubble, there has been stricter ruling for property developers such as China’s Evergrande Group. Developers are now forced to rein in their oversized debt to more manageable levels
This initiative is there to protect China’s property market, but with giants like Evergrande being pushed into the spotlight now, it may be a little too late.
What is Evergrande? Group Segments
Evergrande Real Estate
The Evergrande Group has been making headlines around the world following its astronomical debt crisis. This problem stems from the groups Real Estate subsidiary.
With over 1,300 projects across China, Evergrande Real Estate is the key contributor to the Evergrande group. Their Real Estate arm is a forerunner in Chinese property providing housing for more than 12 million proprietors.
How does the Evergrande Real Estate Business Work?
Evergrande has an extensive history of financing and running its colossal expansion through debt, which in part lead to the rise and fall of the Evergrande empire. The group would snap up land all over China, often paying well above market price to secure land and finance its projects with debt.
Evergrande had easy access to debt facilities from its extensive relationships with the state’s banks, including ownership in some of China’s banks. The group would also raise billions of dollars through bonds. Evergrande would then take deposits from potential buyers and begin constructing massive apartments.
Evergrande sold a large number of its bonds to funds such as UBS and Blackrock. Through using the revenue from previous constructions the group would rapidly begin new projects and expansions, all funded through debt. This cycle continued for years as Evergrande build a massive empire build on debt. As long as new money kept coming in and the Chinese property bubble continued, Evergrande could continue to amass its projects.
With the rising concern of China’s real estate bubble, the CCP (Chinese Communist Party) began regulating the sector heavily to avoid a burst. This eventually led to the fall of Evergrande’s projects.
Evergrande New Energy Auto
China’s Evergrande New Energy Auto also comes under the Evergrande Group banner. This business is separated listed as China Evergrande New Energy Vehicle Group Ltd 0708:HKE, but the overarching Evergrande group maintains control and equity of the business.
Evergrande New Energy Auto is an electric vehicle company that has designed 14 vehicle models, with nine so far available to the public under the Hengchi badge. The group has the ambitious goal of achieving an annual production and sales of 1 million vehicles by 2025 and 5 million by 2035 to become the world’s largest and strongest new energy automotive group.
In reality, the group hasn’t sold a single car yet, meanwhile, tesla saw the production of over half a million vehicles in 2020.
Evergrande Propety Services
Evergrande Property Services much like their Electric Vehicle arm is a separately listed entity under Evergrande Property Services Group Ltd or 6666:HKE.
The Property Services Group manages a portfolio of clients across China including high-end residential, Theme Parks, Healthcare Complexes, Theme towns, Schools, office buildings, and commercial properties to which it provides property management services.
Their total management spans over 400 million square meters across 2,800 clients in more than 310 cities in China.
Evergrande has a 37.55% stake in China’s listend HengTen Networks 0136:HKE. HengTen Networks Group itself is a diversified investment holding company. The group holds stakes across community services, trading of securities, provision of loan financing, and property investment.
The reportable business segments of the company are Internet community and related businesses and Manufacture and sales of accessories.
HengTen Networks has the largest long-video platform in China, Pumpkin Film APP, which provides members with a non-advertising experience. There have been 55 million registered members and 20 million paid subscription users to the platform. It also has Ruyi Films, China’s leading film and television production company.
Early July saw Evergrande entered into an agreement to reduce its stake in HengTen Networks to 26.55% ownership. The 11% reduction will be sold to Tencent Holdings Ltd and an Unidentified entity. The timeframe of the agreement is unclear at this stage but will free up HKD $3.25 Billion (Around $418 Million USD) for Evergrande to facilitate debt settlement.
As part of the agreement, Evergrande has agreed to provide a 5-year loan of HK$2.07 billion to HengTen to support its business development.
Fangchebao: FCB Group
FCB Group establishes a whole channel trade and service platform of real estate and vehicles both online and offline. Or put simply they offer brokerage services for real estate and vehicles. The group has 21 million brokers and 43,000 offline stores attracting over 20 million clients. It is expected to reach an annual trade amount of RMB 2 trillion in 2021.
Earlier this year in March, Evergrande unveiled plans to spin off FCB Group as part of a NASDAQ IPO. The group had secured 17 investors in Pre-IPO raising looking to secure a 10% stake in the real estate and automobile marketplace for HK$16.35 billion ($2.10 billion USD). This deal valued FCB Group at HK$163.5 Billion ($21 Billion USD) in Pre-IPO.
Investors can request Evergrande repurchase the shares at a 15% premium if FCB does not complete its IPO within one year, Evergrande said.
Evergrande’s plan to spin off several units including FCB to lower its debt and help its cash flow.
Evergrande Fairyland develops and constructs a unique theme park that provides full-indoor, all-weather, and all-season services, and also develops “Ocean Flower Island” in Hainan, China, a cultural destination appealing to tourists around the world.
Evergrande Health Group operates “Evergrande Healthy Land”, a health and wellness park, and retirement community with health insurance products. The group works with the Brigham and Women’s Hospital to manage Boao Evergrande International Hospital in Hainan. The hospital sits within the Hainan Healthy Land precinct.
Across the group, Evergrande Health owns 14 “Healthy Land’ communities across multiple cities.
Evergrande Health is also planned and operated by the Evergrande Auto Group (00708.HK).
Evergrande also has a 49% ownership of Evergrande Spring a bottled water segment of the overall Evergrande Group.
Evergrande Spring offers over 50 products namely mineral water, grain and oil, dairy and fresh food. Its products are available in more than 30 provinces and cities across China, as well as over 10 countries.
Evergrande Spring has established partnerships with over 1,000 distributors and more than 500,000 sale outlets across China, according to the annual report.
Evergrande Spring has also been discussing a Hong Kong-based IPO to help provide liquidity to Evergrande’s debt crisis. A potential IPO could raise several hundred million dollars and take place next year, although no further details are clear at this stage.
Evergrande has a number of other industries and subsidiaries. Including Evergrande Life, their life insurance business with total assets of over RMB 230 billion.
|Evergrande Property Services (6666)||61.00%||4,948,602,956|
|Evergrande New Energy Vehicle Group (708)||65.00%||4,840,119,912|
|Hengten Networks Group (136)||26.60%||1,204,455,899|
|Faraday Future Intelligent Electric (FFIE)||25.50%||670,925,641|
|China Calxon Group (918)||26.90%||278,307,398|
|China Bohai Bank Co (9668)||2.58%||64,947,638|
|E-House China Enterprise Holdings (2048)||9.82%||48,565,950|
|Guangdong Meiyan Jixiang Hydropower (600868)||4.95%||41,845,196|
The History of Evergrande
The Evergrande group was originally founded as “Hengda Group” in 1996 by Hui Ka Yan. Hui Ka Yan still remains the major shareholder of the company owning a massive 76.98% of the group.
The company’s history has always stemmed from its property developer roots. 1997 saw the group’s first development off the back of the Asian Financial Crisis. Jinbi Garden was the first which was later sold for RMB 80 million.
In October 2009, the company raised $722 million in an initial public offering on the Stock Exchange of Hong Kong.
How Much Debt Does Evergrande Have? The group’s total liabilities are estimated at 1.97 trillion Yuan ($305 Billion USD), and debt at 572 billion Yaun ($88.57Billion USD).
The full extent of Evergrande’s debt is unclear, most sources estimate its debt to be above $300 Billion. Due to the diversified nature of Evergrande’s debts and liabilities, it is hard to account for all the group’s owings. The group also has a number of off-balance sheet debts. Best estimates as above put their total liabilities and debts at $393.57 Billion USD.
The group’s interest liabilities are said to be rising by around $28 million daily.
Who Holds Evergrande’s Debt? Evergrande’s Debt and liabilities are widely held by Chinese financial institutes, fund providers namely HSBC, UBS, and Blackrock, retail investors through bond investing, homebuyers who place a deposit on projects, and Evergrande’s construction partners including construction material and design contractors.
Chinese Debt Regulation: How Much Does Evergrande Have to Raise?
in 2020 Beijing introduced strict rules for the countries real estate developers, to help protect the sector from a real estate debt bubble.
The rulings are known as the “Three Red line System”
What is the Three Red Line System? The three red lines have been established to prevent a systemic crisis arising from inflated debt burdens carried by China’s biggest developers. The provisions are as follows:
- A 70% ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract,
- A 100% cap on net debt to equity,
- A cash to short-term borrowing ratio of at least one.
|Developer||Net Gearing Above 100%||Cash/Short Term Debt Ratio <1||Liabilities/assets ratio above 70%||Revenue (Billions Yuan)|
|China Fortune Land||203%||0.47||78%||37.4|
Like many others, Evergrande fell short of all three provisions. The group responded by pledging to meet all three by December 2022. However Evergrande struggled with its ratio of cash to short-term borrowings, worsening to 36% from 47% at the end of last year, and its cash and equivalents plunged to the lowest in six years.
“This is a strong warning to the company, We expect an acceleration in asset sales, introducing strategic investors and advancing negotiations with suppliers.”Chuanyi Zhou, Lucror Analytics credit analyst following the provisions to Evergrande
With Evergrande struggling to meet the new measures we saw the group offering properties at major discounts and rushing to take their other businesses public to provide liquidity to the group.
Groups in the red were to be penalized by the government with a set cap in debt growth. While companies that passed the three-line test are allowed to increase their debt by 15% the following year.
How Can Evergrande Pay off Their Debt?
Evergrande’s debt is nothing new, it’s been weighing on their business slowly growing for years. The group has been taking some initiatives to improve cash flow and reduce their debt. This can be broken down into three groups;
- Selling businesses and Raising Capital
- Issuing debt to maintain Cash-Flow
- Selling Assets
Selling Businesses and Raising Capital
One of the biggest plans for Evergrande was improving Cashflow and building their balance sheet by selling off some of their businesses. We saw this with the listing of Evergrande Property Services and Evergrande New Energy Auto.
By spinning off a large stake to the public Evergrande is able to raise a lot of capital to save their primary businesses, while still maintaining control, ownership, and success over the other entities.
However, Evergrande may have been too late to this strategy, with many listing plans announced just prior to the explosion of the debt crisis. With all stocks and bonds under the Evergrande brand being sold off at alarming rates, it seems a little too late to raise capital. The company was in plans of offloading its electric vehicle and property management services stakes.
Issuing More Debt
We have also seen a massive issuance of Evergrande bonds in the past as the group began piling on more debt to build cash flow. In the section below (Evergrande Bond List) we can see the mountain of bonds the group has amassed which will eventually have to be paid back to investors.
|HengTen Networks||HK $2.25b|
|Shengjing Bank||1b yuan|
|Shenzhen High and New Technology||1b yuan|
|Spring Water||2b yuan|
|Five Property projects and non-core assets||9.27b yuan|
The company’s access to freely available cash is also shrinking. We have seen bank accounts frozen and the sale of two of the company’s residential projects halted until mid-October. We have also seen the group selling developments at a steep loss, including talks of selling their head offices for just HK$10.5 billion, 33% less than what they purchased it for.
All three methods of cash flow have been drying up amidst a massive liquidity crunch, leaving Evergrande even more exposed.
USD and Yuan: Evergrande Bond List
Evergrande narrowly escaped defaulting on their Bond Coupon payments on September 23. But when we break down their mountain of bonds, this was just the beginning. Eventually, all bonds will have to be paid back at face value by Evergrande which will amount to a much larger sum than the $83.5 Million payment in September.
Among these bonds, we can see just under USD$3.5 Billion due in the first half of 2022. Along the way, there is also a number of coupon payment due, all of which are to be made in USD. This becomes even more expensive with the falling Yaun.
With Evergrandes bonds being Junk rating, yields have jumped sky-high, and prices are reaching rock-bottom as investors factor in default risks. This is a trend we are seeing across the entirety of China's junk bond market.
Who are Evergrande’s bond holders?
Evergrande Share Price
Seeing red is nothing new for the Evergrande share price which has been on a downwards bearish trajectory for the last four years. In July the Evergrande (3333.HK) share price collapsed, losing a massive 50%.
In just six months Evergrande has managed to wipe away over $100 Billion USD in value from their stock price.
With investors seeing their holdings further cut in half over July, Evergrande's Market Capitalisation lost HKD$8.165 Billion over the month, ranging from HKD$16.33 Billion to HKD$8.165 Billion.
The share price has continued to slip since then, now leaving the group with a market cap of HKD$5.5 Billion. We have seen a massive influx of trading volume over the past five months, as a large number of investors rush to execute a sell trade on 3333:HK.
We do see a sharp increase in Evergande's share price around September 23rd. The day many investors and creditors feared the company to default on $83.5 Million dollars in Coupon payments of US dollar-denominated bonds. The company managed to make the payment. This surprised shareholders who were largely expecting the group to default and pushed the price higher.
It has since restarted its bearish slide as a mountain of debt obligations are still ahead of the company. $83.5 Million was just the tip of the iceberg when it comes to Evergrande's debt.
Evergrande Dividend History
Evergrande's dividend history has been sporadic. Generally, the group pays a dividend in June. We did see the group announce a dividend of HKD$0.1820 in March, for the 2020 financial year. This dividend was payable on 8 July 2021.
Despite Evergrande's chronic debt issue, the group continued to pay dividends each year maintaining a payout ratio of 25%-156%.
A further special dividend was proposed for 2021 but was cut by the group in the interest of creditors.
Evergrande Fundamental Analysis
|Market Cap||$35.247 Billion|
|Shares Issued||13.2 Billion|
|NTA per Share||$14.39|
We can see that Evergrande has been sold down rapidly to a PE of 1.82x, showing very little investor confidence in the group. Although NTA appears high this doesn't account for the mountain of debt held off its balance sheet.
Debt levels have been growing rapidly since 2015, although we do see a reduction in the last year no real decrease was seen across total Owings. We see revenues rising with debt as the company scales back we see a big disparity between the two metrics.
Balance Sheet Assets
Balance Sheet Liabilities
Who Owns Evergrande?
We can see that Evergrande Group has maintained massive insider ownership at around 78%. Of this Ka Yan Hui (Xu Jiayin), Evergrande founder and Executive Chairman owns 76.98% of the company or 10,162,119,735 shares.
Ka Yan Hui's position has landed him a spot on Forbes Billionaire list. Forbes listed Xu as third on the list of the Richest Chinese Billionaires. Although Evergrande's mounting debt and the collapsing share price have seen his wealth slashed by tens of billions over the past five years.
Chinese Estates Holdings Limited (HKE:0127) and CEO Chan Hoi-Wan are also significant holders of Evergrande with a 6.36% and 1.49% respectively. Chinese Estates Holdings is also in the property development and lending business. The group has rapidly been selling down shares and plans on completely dumping its holdings.
Chinese Estate's share price has also been bid down massively at high volumes as investors grow nervous of their massive stake.
We can see fund providers Vanguard and Blackrock has exposure to Evergrande. This is through Funds such as VAE (Vanguard FTSE Asia ex Japan Shares Index). VAE has 1440 holdings with Evergrande being the 601st largest holding accounting for 0.02945% of the fund.
UBS, Blackrock, and HSBC were also accumulating the developer's bonds until relatively recently including when it was already clear the company was experiencing financial difficulties.
Insider Selling: Evergrandes Executives Selling Down
As part of Chinese Estates dropping their holdings in Evergrande CEO Chan Hoi-Wan has been rapidly selling off shares since August. In just under a month Hoi-Wan has sold off HK$115.7 Million, with more selling likely on the way.
"The directors are cautious and concerned about the recent development of China Evergrande Group including certain disclosure made by China Evergrande Group on its liquidity,"Chinese Estates Holdings Limited
The Chinese Estates Holdings group has a massive reliance on Evergrande and bragged about their massive increase in Revenues and Profits thanks to dividends realized from their Evergrande holdings. 35.8% of the group's assets are listed shares and bonds in the failing Evergrande.
The collapse of Evergrande may put Chinese Estates Holding under great financial stress.
Chinese Estate's securities investments in China Evergrande including listed shares and bonds amounted to HK$13,414.2 million (2019: HK$20,012.0 million) or 35.8% (2019: 41.4%) of total assets.
Evergrande's Australian Relationship
On the news of Evergrande's impending bond payment in September, we saw the ASX drop around 2%. Australia is a powerhouse when it comes to the production of Iron Ore. With the unfurling of Evergrande and shaky grounds of what this could mean for China's property boom and developers the spot price of Iron ore has been free falling.
The Bank of America’s global research team is lowering its price forecast for iron ore in 2022 by 45% to $91 per tonne (down from its previous forecast of $165 per tonne) on the back of enforced steel production cuts in China.
With 39% of the world's Iron Ore coming out of Western Australia from our world-class companies like FMG, Australia's best interest is for high Iron Ore prices.
China has a massive appetite for Iron Ore, accounting for more than 70% of the world's imports. Most of this is linked to the Chinese property market which makes up around 30% of China's GDP.
A downturn will see massive drops in the price of Iron Ore. We have already seen panic investors sell their stakes in Miners as ASX mining stock are dropping. However, with companies like FMG still being profitable at rock bottom Iron Ore prices, this can create opportunities for investors. Here is our analysis of FMG and the Iron Ore market.
Is Evergrande too big to fail: Crash Immintent?
At this stage, it's difficult to imagine a possibility where Evergrande doesn't fall. With everything under the Evergrande brand being sold off at rock bottom prices and the massive liquidity crunch, the question becomes When will Evergrande fail? And what will this look Like?
When Will Evergrande Fail? It's difficult to say when the company will default on payments and fail. With a massive USD$3.5 Billion in bonds due in the first half of 2022, it seems the default is imminent. The CCP is currently in talks with Evergrande and looking to head up the group's liquidation.
Who Will Be Impacted by Evergrande? Evergrande has a large network of relationships that will be hit by the debt explosion. Depending on the details of the liquidation we may see Evergrande shareholders lose all their capital, Banks with Evergande on their balance sheet may see large impairments, Bondholders such as retail and funds like UBS and HSBC will lose value on their investments, and contactors of Evergrande may not be paid for their services. Perhaps the most heartbreaking and biggest impact will be the families of China who put down deposits with Evergrande who stand to lose a house and deposit for some time.
Evergrande owes money to around 171 domestic banks and 121 other financial firms
What will the fall of Evergrande look like? There are three popular opinions for the events surrounding the downfall of Evergrande.
- A Complete Fail of Evergrande- With No Government Bail Out
- The Government Assists in the Slow Collapse and Liquidation
- The Government Bails out Evergrande
A Complete Fail of Evergrande- With No Government Bail Out
The complete failure of Evergrande would have massive repercussions for Evergrande's stakeholders and the Chinese financial system. With China's developers, all being heavily in debt investor confidence will ween from the property sector. We would see banks, investors, and funds shy away from developers creating a credit crunch for China's massive Real Estate sector.
With the real estate sector accounting for 30% of China's GDP this would put a dampener on the Chinese economy.
With the downfall of Evergrande, we will see defaults across their debts and liabilities leaving many contractors unpaid and banks across the country realizing impairments, again impacting the wider Chinese economy.
An Evergrande explosion would also see 1.7 million Chinese families homeless with no deposits recovered. With growing concerns of this possibility, we have seen rioting and general unsettling throughout China. On the back of Hong Kong riots, further trouble across China will lead to widespread Chinese upheaval.
This Article Discusses the politics of: What the Evergrande Meltdown Means for China?
Factors For and Against a Government Bailout
For A Bailout
- Avoid Rioting and Upevil against the state
- Avoid an economic downturn throughout the property and financial sector
Against A Bailout
- Setting expectations of Bailout, encouraging riskier practices
- Increased government borrowing and debt, in an already uncertain time
Evergrande's Heicharchy of Debtors: Who will get paid?
- Suppliers and Customers: Supliers and contractors of Evergrande who have completed work for the group will likely be first to be paid along side the 1.7 Million customers that put up a deposit for housing.
- Banks and Wealth Management Investors: State-Owned banks are among the biggest holders of Evergrandes debts. They will receive money after liabilities are paid out. Alongside wealth management investors who were promised low-risk mortgage based securities.
- Unsecured Debtors: Many international and domestic funds and private investors hold Evergrande Bonds. These unsecured debtors will be paid out after all liabilties and secured debts.
- Shareholders: Any remaining capital would be returned to shareholders
From the scale of Evergrande numbers, we could expect suppliers and customers to be paid out in full. Banks and Wealth Management Investors are likely to receive a large portion of their debts paid back. Unsecured debtors and shareholders will be unlikely to receive funds. This is a broad generalization and depends on the exact liquidation of the group.
What Is Evergrande: Prophet's Take
Evergrande is Chinas most indebted and second-largest property developer. The group has leveraged itself heavily into China's property boom. But increased regulation has exposed their crippling debt and forced them to reduce their risk in line with China's Three Red Line policy.
In trying to leverage down the company has been caught out defaulting on contactors and ruined investor's confidence. With investors rushing to sell Evergrande, the run on the group has caused a credit crunch which has Evergrande stuck with its crippling debt.
With a complete failure of Evergrande likely imminent, this may have massive impacts on other interlinked indebted developers and state banks. Complete failure may end Chinas massive property boom, dampening the global economy and leading to social unrest.
For Information on Evergrande's impact on Iron Ore and what this means for Australia, Read our article: Should I Buy Fortescue Metal Shares 2021?