Evergrande Real Estate Group

OVERVIEW IN DEPTH

The Evergrande Group or the Evergrande Real Estate Group (previously Hengda Group) is China's second-largest property developer by sales, and the 122nd largest group in the world by revenue, according to the 2021 Fortune Global 500 List. It is based in southern China's Guangdong Province and sells apartments mostly to upper and middle-income dwellers. In 2018, it became the world's most valuable real estate company.

Evergrande Group is a Fortune Global 500 enterprise group integrating properties for people, new energy vehicles, digital technology, cultural tourism, and health and well-being management. At present, Evergrande Group has total assets of RMB2.3 trillion, annual sales volume exceeding RMB700 billion, accumulative tax payment exceeding RMB300 billion, charity and public-welfare donations accumulated to RMB17.29 billion, 120,000 employees, and job offers exceeding 3.3 million per year, ranking No.152 among the Fortune Global 500.

With profits limited to gains from the disposal of assets, the Evergrande group holds a debt pile of $300 billion including bank loans, short-term borrowings, and supplier credit. According to Ming Zhao, a former hedge fund manager, 35% of Evergrande's debt is interest-bearing and the interest payments are to the tune of 180 million yuan every day when the company’s cash position is merely 150 billion yuan.

Hence Evergrande is most likely to default its upcoming interest payment of $83.5 million (5 billion yuan approx.) relating to its March 2022 bond and a further payment of $47.5 million (3 billion approx.) on September 29 relating to the March 2024 bond.

MARKET CONDITION OF EVERGRANDE

The Indian market witnessed massive wealth destruction on Monday. The equity investors have left poorer by Rs 3.78 lakh crore, as their total wealth represented by BSE market capitalization declined to Rs 255.18 lakh crore. This means they lost over Rs 1,000 crore per minute!

Sensex fell 524.96 points or 0.89 percent to close at 58,490.93. The index gyrated 813 points before closing near the day’s low. Its broader peer NSE Nifty declined 188.25 points or 1.07 percent to 17,396.9. The price of spot iron ore for delivery to north China slumped 22.2% to $100.45 tons. The steel-making ingredient has fallen 57.4% from the record high of $235.55 a tonne in May. Shares of Evergrande plunged 19% in Hong Kong trading to an 11 year low on default concerns. China, the largest metal consumer, consumes about 60-70% of the commodity. According to some predictions, the Chinese housing market could be on a decline for many years to come, leading to a fall in the demand for metals. The fall in demand for metals in China will indirectly impact India. The other sectors likely to get impacted are steel, iron ore, textiles, garments, chemicals, and tires, depending on the steps the Chinese government takes to contain the Evergrande risk.

Mr. Yan, the chairman of this group has lost its fortune earned out of it, that is his wealth plummeted from $84 bn to $7.4 bn in the last 3-4 years, and nearly 80% of the stock value has fallen during this year only.

If this group fails it will lead to huge job losses and bank and financial institution failure because of its mammoth debt and interest piling up day by day, and since China is the second-largest economy in the world there will be a domino effect on the other economies of the world, which would be seen in the stock and financial markets.

MARKET CAPITALIZATION & BOND TREND

As per various media reports currently, around 60 to 65 million units are vacant representing more than 21% of all homes in urban China. Any default would start a selling frenzy in the housing market pushing down prices further. As real estate accounts for a large store of wealth for Chinese citizens, a deep price cut would severely impact consumption. According to Bank of America, Evergrande is the largest high yield dollar bond issuer in China, accounting for 16% of outstanding notes. Evergrande collapse may push the default rate on the country’s Junk dollar bond market to 14% from 3%. Such a spike in default rate could spill over to the rest of the high yield market in China and other bond markets. Experts believe that the High yield credit market may go for a toss in case of Evergrande default and contagion may spread to other markets like equity market and investment-grade corporate bond markets.

China’s economy is highly leveraged. According to the Institute of International Finance, the total debt of China stands at $92 trillion and the debt to GDP ratio at the end of June quarter stood at 353%. With such a high GDP to debt ratio, any slowdown due to real estate companies' default could put China in a tough spot as the government has less space for fiscal maneuvering. A collapse of Evergrande will have a large impact on the job market as it has 200,000 staff and hires 3.8 million people every year for project developments.

Markets were spooked on Monday with America’s S&P falling 1.7% after Evergrande closed 10% down in Hong Kong – the lowest since May 2010. But the territory’s Hang Seng index recovered on Tuesday, closing up 0.5%, and the S&P has also regained lost ground. Around 50% of revenue for Europe’s luxury goods sector comes from China. Any slowdown in China will impact European luxury markets. European powerhouse Germany exports over 10% of its total export to China. Any slowdown in China will make economic recovery hard for already aging and slowing Europe. China holds over $1.1 trillion US bonds and treasury notes. To pay dollar-denominated liabilities of Chinese real estate companies, China may choose to either sell this debt or devalue the yuan. In both the conditions, the tension between the US and China may be stretched further

ANALYZED FINANCIALS FOR EVERGRANDE

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