Xu Jiayin, founder of China Evergrande Group, a member of the so-called “Big Dee club” started by Hong Kong billionaire Cheng Yu-tung, has again displayed his balance-sheet management skills.
The tycoon is overseeing an initiative by his firm, which is China’s second-largest property developer by sales, for disposal of three non-core businesses — bottled water, grain & oil, and dairy products — for a total of 2.7 billion yuan (US$405 million).
The company ventured into non-property sectors in 2014, and Xu was able to expand the businesses quickly.
For instance, through sponsorship of the football club Guangzhou Evergrande, also owned by Xu, the bottled-water brand Evergrande Spring quickly became a household name.
But gaining market share is one thing, making profit from it is another.
Grouped together as “other business” on Evergrande’s books, the three units reported total sales revenue of 5.12 billion yuan last year, but their net loss was almost as large — at 4.48 billion yuan.
The businesses carried a debt load of 3.3 billion yuan, adding to the group’s already sizable leverage burden.
So, it was quite impressive that Xu was able to find buyers for the units at a good price.
Selling to three different buyers, Evergrande will receive a hefty sum and will enable it to book some one-off gain.
Evergrande only revealed the names of buyers, without going into details.
One of the counterparties is a Shenzhen-based car dealer of BYD, which paid 1.8 billion yuan for the bottled-water unit.
Now, it begs the question of why a car dealer would want to own a completely unrelated business.
The terms of the transactions appear to be very much in favor of Evergrande, except for one thing. Buyers only need to pay 10 percent for the first installment, with the balance to be spread over three years.
If buyers choose to walk away from the deals for whatever reason, Evergrande could suffer.
But at least for now, Evergrande has removed three bad businesses, which would be good for its rating and fund-raising activities.
This article appeared in the Hong Kong Economic Journal on Sept. 29.
Translation by Julie Zhu
[Chinese version 中文版]
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