25 September 2018

Can Evergrande sustain its heady show?

Evergrande Real Estate Group (03333.HK) has won a special place in the hearts of China’s soccer fans as its team stormed this year’s Asian Football Confederation premier club competition and walked away with the championship last Saturday, sparking a wave of jubilation across the country.

The team’s success will be heartening for Evergrande’s founder and chairman Hui Ka Yan {許家印}, who is also a member of the standing committee of the Chinese People’s Political Consultative Conference — the top political advisory body – as it will enhance the group’s profile and boost its chances of grabbing prestigious new property projects.

2013 is certainly a remarkable year for Evergrande as the developer is well on its way to nearing the 100 billion yuan (US$16.42 billion) mark in annual home sales – aggregate sales for the first ten months of this year were up an impressive 25.3 percent to 91.27 billion yuan, helping the company earn a place among China’s realty titans.

Fame and fortune notwithstanding, the stock market’s response to the counter has been rather lukewarm. Evergrande’s share price has lost 28 percent so far this year and has been hovering near the lows for the most part.

Although the firm highlighted in its 2013 interim report that its net debt ratio had been significantly trimmed to 58.4 percent, from the end-2012 level of 96.1 percent, on the back of burgeoning sales, a BNP Paribas analyst has told the 21st Century Business Herald that the actual figure could be as high as 134 percent if the staggering amount of its outstanding land premium payment – reportedly 43.65 billion yuan in total – is included in the calculation.

Evergrande’s triumph on the soccer field will not be able to take investors’ minds off the firm’s financial position, as the company faces imminent debt repayment pressure. More than 80 percent of its borrowings — 61.42 billion yuan in total — will mature in the next two years.

On top of the HK$4.35 billion that Evergrande raised through share allocation earlier this year, the firm has been issuing senior notes. Naturally, most of the funds raised will be used to repay maturing debt.

Evergrande also needs to maintain the torrid pace of home sales to ensure a healthy level of cash inflow to support its high-leverage, quick-expansion model.

While the developer is far from any sort of crunch at the moment, analysts fear that some strain will soon loom large on the horizon if the company fails to diversify its product portfolio and penetrate deeper into more top-tier urban centers.

It is common knowledge that despite the fierce policy headwind, developers can still rake in hefty profits in the country’s “big four” metropolises as demand there cannot be easily dented. But companies focusing on smaller cities can be easily embroiled in a lengthy, painful destocking process due to regional oversupply.

Evergrande had a paltry seven housing estates under construction in Beijing, Shanghai, Guangzhou and Shenzhen as of October, and contracted sales from those projects accounted for less than one percent of the firm’s total during the period. Meanwhile, third-tier cities accounted for nearly 58 percent of its ongoing projects.

– Contact the writer at [email protected]



EJ Insight writer

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