Troubled property developer China Evergrande Group (HK:3333) (EGRNF) is fighting for its life, and its efforts to sell off parts of the company appear to be bearing fruit.
That suggests China Evergrande will resist attempts to nationalize it, split it up, or force its sale to state entities. The Chinese authorities have in the past encouraged Evergrande to sort out its own problems, but it appeared incapable or unwilling to do so. Its massive debt burden of around US$305 billion, equivalent to 2.1% of the country's entire economy, therefore poses a systemic risk if it starts a series of rolling defaults in the property sector.
Trading in the securities of troubled property developer China Evergrande Group was halted on the Hong Kong Stock Exchange at the request of the company on Monday, pending "inside information about a major transaction."
Fellow China-focused developer Hopson Development Holdings (HK:0754) also asked for its stock to be suspended for the day, with a "major transaction" in the works, where Hopson is due to buy into a target company, also Hong Kong-listed, and possibly have to make a mandatory offer for the rest of its shares.
The two are connected, according to the state-owned Global Times newspaper. Hopson is reportedly due to buy 51% of Evergrande's separately listed property-management spinoff for more than HK$40 billion (US$5.1 billion).
Trading in that unit, Evergrande Property Services (HK:6666), is also halted on Monday.
Any agreement follows Evergrande's deal on Friday to sell a 19.9% stake in the regional Shengjing Bank back to the bank for C¥10.0 billion (US$1.6 billion). Evergrande, which previously held 34.5% of the Shenyang-based bank, will see its holding cut to 14.6% of its stock.
If Evergrande completes both the Shengjing Bank and Evergrande Property Services deals, it will at least have some financial breathing room. It is pending default and complete collapse, with the Beijing authorities encouraging state-backed property developers and state-owned enterprises to buy some of Evergrande's assets.
Evergrande last week missed two coupon payments worth a combined US$131 million on its offshore bonds.
Mainland Chinese markets are closed from Friday through Thursday in honor of China's national day, marking the foundation of Communist China on October 1, 1949.
In Hong Kong, the markets resumed trade on Monday after a three-day weekend. The benchmark Hang Seng index posted another significant loss, falling 2.2% to a one-year low. It stands at a similar level to the start of October 2020, when the Hang Seng had yet to recover its COVID-induced losses that March. It has given back all of the 30.8% it gained in its COVID bounce back between October 2020 and February 2021.
Mainland-focused stocks were the big drag on the Hong Kong market on Monday. The Hang Seng China Enterprises Index fell 2.4%. Thanks to decent performance from Hong Kong-focused developers, the property sector actually held up pretty well, with the Hang Seng Properties Index only slightly down, with a 0.2% loss.
Today's deal, if confirmed, would suggest that Evergrande sees a future in which it can avoid the state having to step in. It would need to sell off a large amount of property projects, too. Well-capitalized Chinese developers like China Vanke (HK:2202) and (CHVKF) and China Resources Land (HK:1109) and (CRBJF) stand to benefit if Evergrande starts selling off projects at firesale prices.
When the Chinese government steps in to bail out a company, it inevitably forms a special-purpose vehicle to absorb bad debts, dissolves the previous company, and often arrests and charges the top management with fraud and financial crimes for good measure.
After opening with a 6% initial loss, Evergrande New Energy Vehicle Group (HK:0708) shot up 29.1% on Monday, investors speculating that a Hopson deal bodes well for Evergrande's entire stable of companies.
Investors should steer clear of the Evergrande electric-vehicle spinoff, though, which also builds and manages hospitals and elder-care facilities. It has yet to sell a single vehicle, and hasn't produced its own technology to do so, trying to buy its way into the industry instead. The share price reflects that, with Evergrande New Energy Vehicle down 87.3% so far this year.
Evergrande's implosion, while dramatic, is not similar to the bankruptcies of Enron or Lehman Brothers. In those cases, the companies proved to have far more liabilities and spiraling derivatives losses that meant the companies were actually insolvent. In the case of Enron, it's not even clear its energy-trading business was making money in the first place.
As of June 30, Evergrande had C¥2.38 trillion (US$370 billion) in assets, against C¥1.95 trillion (US$305 billion) in liabilities. But that's the official figure... its financial picture is masked by off-balance-sheet debt that the company also owes, such as commercial notes owed to suppliers and the wealth-management products it has sold to homeowners, employees and others.
Still, Evergrande has real bricks and mortar to sell. Based on those face-value tallies, the company is still in the black if it was dismantled, and everything sold off. It is mainly struggling under the weight of its interest-bearing debts, worth C¥571.7 billion (US$89 billion), as well as a forced deleveraging ordered by Beijing. Its financial model had been based on using fast sales to fund fast land purchases and fast development. A lack of credit is curbing its ability to bring in the kind of money that it needs to keep its extremely high leverage under control.
Evergrande has had trouble paying just about everyone: construction suppliers, wealth-management investors, banks, bondholders, employees. Developments are getting mothballed because it can't pay the bills to fund the building. Earlier this year, it announced a trickle of small deals to whack this or that debt mole on the head, but started running out of hammers and hands to keep the mounting moles under control.
Throughout the year, it has been trying to offload stakes in the property-management arm and electric-vehicle unit, to no success. Its US$2 billion flagship building in Hong Kong is also on the trading block.
A string of asset sales could give it the money it needs to cling on to at least some of its developments. Given how bad its brand now is in China, it will face a long climb back to respectability in terms of the property-buying public. It appears to be willing to fight that fight.