As China’s largest property developer, Evergrande has never been short on figures to stir awe — and alarm.
The company’s land reserves, built during a breakneck expansion as China urbanised, are vast enough to house roughly 10m people. But it is the $123bn in debt Evergrande amassed along the way that has led to wild trading in its shares and bonds over the past week.
The convulsions were triggered after a letter began circulating online last Thursday that purportedly showed Evergrande asking the government in Guangdong, where it is based, for help in averting a potential cash crunch. A furious denial from the company, alleging the letter was fabricated, and a series of announcements in the past few days have gone some way to quelling fears about the highly-leveraged developer.
But the episode is a reminder of the polarising effect of a company that has come to embody the perceived excesses of China’s debt-fuelled real estate industry. Some believe a painful reckoning has long been inevitable for Evergrande; others that the fears are overdone and that Beijing would never let it fail, anyway.
“If someone believes it is too big to fail . . . this was a buying opportunity for them,” Soo Cheon Lee, chief investment officer at SC Lowy, said of the recent trading in Evergrande’s securities. “That’s effectively the bet — that’s why some people are buying it and some people are selling it,” he added.
Evergrande delivered impressive returns to its shareholders in the years following its 2009 initial public offering in Hong Kong. The stock surged more than eightfold between the IPO and its peak in late 2017, outpacing a roughly 30 per cent gain in Hong Kong’s benchmark Hang Seng index.
Founded almost a quarter of a century ago by its chairman, Hui Ka Yan, Evergrande was one of the biggest beneficiaries as government reforms in the 1980s paved the way for an expansion of private home ownership. Residential property sales make up the vast majority of Evergrande’s revenues.
By 2017, the wave of migration to China’s cities — and the need for housing that followed — had turned Mr Hui into the country’s richest man, with an estimated net worth of $42.5bn.
Underpinning Evergrande’s success are debts that dwarf that of every other property group. And its borrowings were at the heart of the storm that kicked off last week with the document claiming that the group was in need of government help to secure regulatory approval to list its mainland subsidiary, Hengda Real Estate, on the Shenzhen stock exchange.
The company had raised about Rmb130bn ($19bn) by selling stakes in Hengda, but would have to repay the money if the subsidiary failed to list by January. After the Hong Kong stock market closed on Tuesday, Evergrande said it had struck an agreement with investors owning Rmb86.3bn of the stakes that they would not demand repayment.
The accords are likely to help allay fears over a cash crunch at Evergrande that were magnified after Beijing recently signalled its concern over the scale of leverage in the real estate industry. At the end of last year, Evergrande had a net debt to equity ratio of 181 per cent.
According to local media reports, the government last month held a meeting with major developers, including Evergrande, to outline its “three red lines” policy which would restrict borrowing based on various accounting measures.
Evergrande is “so highly leveraged it’s likely to breach all of the alleged thresholds”, said Christopher Yip, a director at S&P Global Ratings. “Even though it has plans to deleverage, we haven’t seen progress nor understand the details on how these may align with reported government initiatives,” he added.
In March, the developer said it planned to cut its debt by Rmb150bn a year through to 2022. Last week, as prices for its bonds and shares swooned, Evergrande said its “operation remains solid” and that it had redeemed $1.6bn of senior notes maturing this year early.
Long before last week’s ructions, there was evidence of concern among investors. Since peaking in late 2017, Evergrande shares have halved in value. Two years ago, Mr Hui bought $1bn of the company’s newly issued $1.8bn bond, which offered an eye-watering interest rate of 13.75 per cent.
The performance of China’s housing market offers succour for both Evergrande’s bulls and its bears. House prices have risen sharply in recent months as part of a broader economic rebound from the pandemic, with new home prices climbing the most in two years in August.
However, since early September, Evergrande, which has just over 130,000 employees, has discounted new homes by 30 per cent. In a statement the developer said this was a “normal sales strategy” during China’s peak buying season, known as “golden September, silver October”.
How the market unfolds in coming months will be key for Evergrande, which in the first half of this year launched 63 new projects in several dozen cities. The group’s sales in the first half rose, though profits fell to Rmb15bn ($2.2bn), compared with Rmb27bn in the first half of 2019.
Most agree that serious strains at Evergrande would spell wider damage for China’s $43tn housing sector and the wider financial system.
“It would cause a significant impact on confidence in property,” said Andrew Collier, managing director of Orient Capital Research in Hong Kong, though he stressed that Beijing would intervene if the developer ran into trouble.
And while Evergrande denounced the letter as “pure defamation”, there are signs that it is alive to concerns over its debts. Late last week, the group said the Hong Kong stock exchange had approved a spin-off of its property management business, which was recently valued at about $11bn and will help it generate cash.
After tumbling 10 per cent on Friday, Evergrande’s shares rallied sharply on Monday and closed little changed on Tuesday. Prices for its debt have also stabilised though one of its dollar-denominated bonds, which make up a significant portion of Asia’s high-yield debt market, was trading at 84 cents on the dollar this week, down from 99 cents last Wednesday.
Nigel Stevenson, an analyst at Hong Kong-based group GMT Research and long bearish on the company’s prospects, said Evergrande had spent years buying land in the hope that it would become part of China’s “urban sprawl”.
Just as it was during the company’s hard-charging early years in the 1990s, Evergrande’s long-term fortunes are tied to how much further China’s historic urbanisation has to run.