Everything’s 25% Off at the World’s Most Debt-Squeezed Company
China Evergrande Group has slashed prices of properties sold this month and next, but its share price has actually risen
When a company has the highest debt interest bill of any listed firm in the world, its traditional route of sales has frozen almost completely, and it cuts prices by a quarter, is that good news?
According to the equity market, it is indeed. China Evergrande Group’s EGRNF 3.56% share price is now roughly flat since January 23, when the quarantine of the city of Wuhan began. What happens next will be a test case for Beijing’s relationship with the country’s gigantic property developers.
This week, Evergrande announced a 25%-off sale on properties listed on an online platform in February. Prices will be cut by 22% in March, while many physical sales centers are shuttered in the wake of the country’s coronavirus outbreak.
There’s a good reason for the company to want sales to continue. Chinese developers are increasingly reliant on rapidly growing presales of uncompleted properties for financing. Evergrande has $1.6 billion in dollar bonds maturing this March, and the largest debt interest bill of any publicly listed nonfinancial company on the planet, at around $8.5 billion in the last 12 months, according to Capital IQ data.
But it isn’t just the company’s enormous debt pile, which netted out at $88.46 billion as of June last year, that bears watching. The company’s account payables—money owed to suppliers—stood at $93.36 billion in June 2019. That is roughly double what they were a year earlier.
Other parts of the balance sheet are confusing. Unlike other developers, Evergrande reports relatively little unearned revenue, the category in which sales income from unfinished construction is reported, despite the major increase in presales.
In many parts of the world, the combination of eye-watering leverage and sputtering business activity could eviscerate a company. But while Evergrande looks like a juicy target, any investors with the stomach to bet against it have ended up with severe indigestion. The company hasn’t defaulted on any of its dollar debts, and its stock rallied more than 400% in 2017.
That was in no small part because of the Chinese government. Evergrande sold a stake in Hengda Real Estate, a subsidiary, and found interest from a number of state-owned enterprises.
Ultimately, the company’s performance will be a political decision this time too. In the last two years, Beijing has made a handful of steps toward a property market with fewer unconditional guarantees for developers. Small firms have been allowed to go bankrupt to encourage consolidation in the sector.
But allowing a developer like Evergrande with hundreds of millions of square meters of property owed to middle-class buyers to be threatened by hostile market forces would be much riskier. With the veiled weight of the Chinese state behind it, optimistic equity markets may be right.