23 February 2019
China Evergrande Group founder Xu Jiayin has been able to sail through crisis one after another despite concerns about the firm's high leverage. Photo: Bloomberg
China Evergrande Group founder Xu Jiayin has been able to sail through crisis one after another despite concerns about the firm's high leverage. Photo: Bloomberg

How did Evergrande keep proving the naysayers wrong?

Mainland property plays have in general done very well this year, in particular highly leveraged developers.

Sunac China Holdings (01918.HK), Country Garden Holdings (02007.HK) and Agile Group Holdings (03383.HK) soared 86 percent, 90 percent and 79 percent, respectively, in the past five months or so. Among these, China Evergrande Group’s (03333.HK) rally was the most spectacular.

Having surged 141 percent year to date, Evergrande’s market value has already surpassed the HK$150 billion mark.

Evergrande is in fact quite an intriguing and controversial company.

Starting out in Guangzhou in 1996, the developer has always adopted an aggressive approach.

It nearly got into big trouble in 2008 when the economy tanked and liquidity dried up. Evergrande was hanging by a thread as it had to shelve its IPO plan.

Fortunately, Xu Jiayin, founder of Evergrande, was able to obtain financing from Hong Kong billionaire Cheng Yu-tung at the last minute. And the company survived the financial crisis.

Call it luck or business acumen, Evergrande has always been one of the most heavily indebted companies in the sector but Xu time and again sailed through downturns.

Evergrande’s debt ratio exceeded 400 percent. Just when numerous analysts predicted the demise of the developer, Evergrande rode the super bullish property market in China last year to reap big profit as well as cut back its borrowings.

Last year, Evergrande reported revenue of 373.3 billion yuan, 85 percent higher than the year before and replaced Vanke as China’s largest property developer.

Two other factors also supported Evergrande’s share price rally.

First is its plan to seek a backdoor listing on the domestic stock market by taking control of Shenzhen Special Economic Zone Real Estate & Properties (000029.CN).

Another factor has to do with short sellers.

Constantly regarded as the most risky property play, Evergrande attracted a lot of foreign investors to short sell its stock.

The sustained rally of Evergrande shares this year, which has been fanned in part by its HK$6.3 billion share buybacks over past one month was killing these short sellers.

As a result, many short sellers have caved and bought shares to close their positions. The share price soared 39 percent in past five days of trading and the short selling ratio slumped to below 5 percent from nearly 25 percent early this month.

But can Evergrande and the sector as a whole keep charging higher?

A number of negative developments may stand in the way.

For starters, the government has severely tightened property rules to prevent a housing bubble.

Moody downgraded its rating of China’s sovereign debt one notch to A1 from Aa3 on Wednesday, citing concerns over growing debt in the country.

It had warned earlier that China’s bank loans hit a record high of 12.65 trillion yuan last year. Of this, nearly half is directed to the housing market, thus inflating the risk to the banking system.

While the government is heavily reliant on land sales income, an overly heated housing market is like a time bomb. It would be a very difficult balancing act.

This article appeared in the Hong Kong Economic Journal on May 25

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe