Evergrande was previously the top real estate developer in China, and also was one of the biggest market movers in the region.
However, today they are sitting bankrupt and scrounging, trying to figure out a way to pay back their debt obligations.
Taking a look at the company’s financials, we noticed that between the years 2004-2020, Evergrande’s average revenue growth per year was reported to read approximately 44%, which lead them to be one of the most rapidly growing companies in China.
Evergrande’s main resource has always been through liability, whereby CEO Haijun , maintained a debt to equity ratio of approximately 11.9 throughout the past 5 years.
He also is an expert in building connections which he would use to acquire more credit and continue scaling his business.
As a result of borrowing more than $300 billion throughout the years, this helped Evergrande in expanding aggressively and becoming one of China's largest real estate companies.
However, in the financial corporate world, high debt means high responsibility. For that reason, they were unable to pay back their investors and meet their financial obligations.
This also lead the company to declare bankruptcy.
Currently, the Guangzhou government has had to step in, to manage the crisis and improve the situation; by selling off assets the business owns such as Guangzhou FC.
Throughout the past few months, Evergrande has sold assets to pay its creditors, investors, and suppliers.
But the question remains whether or not the Guangzhou government will retain management/operations in the future, in order to prevent another crisis if the business does get back on its feet.
Earlier this week, Evergrande’s board of directors forced its CEO and CFO to step down, claiming they took part in a fraud involving pledge guarantees that were routed back to the debt-ridden developer through unnamed third parties.
As Evergrande copes with a $300 billion debt obligation, the company will also consider hiring an internal control consultant to conduct a comprehensive internal control review.
Currently, the issue is that companies such as Evergrande are continually borrowing capital from offshore lenders/investors to fund their projects and even pay back previous debt without accounting for the future of those projects.
The ratio of empty apartments in China ranges from 10% and in some smaller cities, it reaches 40-50%.
That meant they aren’t able to sell the constructed apartments at expected rates, noting that the main reason is due to the lack of liquidity in the whole community
According to “Numbeo.com”, housing purchasing power in China is among the lowest in the world. It would take over 50 years for the average household income in Beijing to purchase a standard apartment compared to 15 years in London for example.
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Figure 2: Source, TradingView, China Evergrande Group 1D Time Frame
Looking at the charts, (Figure 2) we noticed that the stock price of Evergrande gapped by almost 45% on the 25th of July 2022.
This movement came as soon as they announced they will restructure their debt, and that might hopefully get them back on track, which boosted the price significantly.
Should they fail to successfully restructure their debt, Evergrande will have a significant impact on the Chinese economy.
To begin with, many people purchased properties from Evergrande before construction started. In the event of bankruptcy, the deposits paid by the customers could be lost.
On the other, Evergrande works with multiple other companies across different industries and even countries. This might have a domino effect on other businesses, as they won’t be able to receive payments and make payments to cover costs in general.
The financial crisis could force construction and design firms as well as major raw materials suppliers into bankruptcy.
The failure of Evergrande could have repercussions on China's financial system. whereby financial institutions and banks, might be forced to adapt to such a big unexpected default.
As a result, companies that wish to get credit, have to go through tighter credit screening, which might lead to a credit crunch.
When companies cannot borrow, they find it difficult to grow, and in some cases cannot continue operating.
Evergrande is not just facing default, they are also facing global inflation, increases in energy products, trade wars, and much more. This will not make it easy for the company to restructure in a smooth manner, however, the country is relying on that.
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