Understanding Evergrande in depth

Introduction: -

In the recent few months, we’re hearing continuously about the Evergrande group and its crisis.

Indian stock market is at its peak all-time high Sensex reaches 60,000 which is a record high for India and when we see another stock market like the US stock market it’s doing well but China’s stock has performed worst till now in 2021, one of the key reason is Evergrande Crisis, a company which is worlds most valuable real estate company in 2018 today carries a debt of about $300 billion higher than the Nominal GDP of 169 countries in the world.

The company starts in 1996 worked as a real estate company, within a few years Evergrande creates a global image as the most trustworthy and profitable company in China.

Analysis: -

In the year 2000, the Chinese bank issued some new policies which simplified the loan process and give more borrowing power to companies to borrow money from the public. Evergrande decides to take investment from the public sector and promises investors to build houses for them in the next 5-6 years.

Everything is in place till they extend the dates of delivering house to their investor in 8-10 years. Still, people invest in Evergrande as they have more brand names and people had faith in the Chinese economy and power.

People in China invested billions of dollars, assuming it is a safe investment over the period.

Due to such huge assets under control and money in the account, they want to expand their business around the world, they approached Chinese banks for more loans, and due to such huge name and brand value they (Evergrande) started getting billions. As Will Rogers once have said.

“Too many people spend money they haven't earned, to buy things they don't want, to impress people that they don't like.”

―?Will Rogers

?The hunger of Evergrande could not stop here, for more money they start selling bonds in open market Evergrande built a property sold long before completion to Chinese eager for either a new home or a safe place to invest their growing income, and the company then used the money to build more.

They show themselves as a safe and growth-oriented investment when the bank only gives the interest of 2-3%, Evergrande promises to give returns up to 8%.

With the real estate business booming, it even branched out into theme parks, bottled water, and also soccer ownership.

One of the famous packed water bottle products they launch is Evergrande spring and hire Jackie Chan as a brand ambassador. They have a plan to expand more in the soft drink and FMCG sector and compete with global brands. As a part of the plan, they buy one franchise football club in China named “Guangzhou FC” everything is in place till 2017.

In the year 2018 total debt on Evergrande crossed $300 Billion which is higher than the GDP of 169 countries, although it also amassed $300 billion in debt, equivalent to about 2 percent of China’s gross domestic product, making it the world’s most indebted developers.

Now a slowing property market and the ruling Communist party’s efforts to remake the Chinese economy have forced a reckoning with Evergrande’s issues, the years.

However, of late property sales have been declining for months leading to the company constraining its cash flow further.

In addition to bondholders, the company owes USD 103 billion to construction companies and other business creditors.

Beijing brought in new rules to control the amount owed by big real estate developers the new measure led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.

Now, it is struggling to meet the interest payments on its debts.

This uncertainty has seen Evergrande’s share price tumble by around 80% in 2020, its bonds have also been downgraded by global credit rating agencies.

Some of the firms with holdings in Evergrande bonds are Ashmore group, BlackRock, HSBC Holding, and UBS Group.

China’s banking system is very OPEC means you can’t see inside of the system, till now the world doesn’t know much loan does Evergrande has in its head only a number which is shown by the government we are believing it as true.

?Key learnings and lessons: -

·??????You can’t predict the market based on the future holding of the company, we should analyze the company as a whole and need to understand the market model of the company.

·??????Don’t get yourself into debt

-In the modern age, it’s never been easier to get in debt, and it’s never been harder to get out of it. Banks, financial firms, invest funds, credit card companies, and even some individuals can lend you money within a few clicks or using a card. This is how they are in business; they make billions of dollars through interest payments and fees. Ironically, they will always encourage you to borrow more as they care about you. DON’T FALL FOR THIS TRAP ??

?* ?Be wise about the reason you want to get a loan.

- In my life, I’ve seen numerous people get in financial troubles because of nothing but peer pressure.?This is simply, buying things you don’t need with money you don’t own just because “People are doing it, and it looks cool”.

You don’t need the latest iPhone or the most expensive clothing brand (if you can’t afford them) to be accepted in society, peer pressure is only in your brain, it’s not real! If you are really amongst a group of people that demand you to get in debt to buy unnecessary things for you, change those people, and run away, you are surrounding yourself with toxic people.

·??????Consider a safety margin before applying for a loan.

-???????Let’s assume you found a good investment and you need cash, ask yourself how much do I need to borrow so I can be safe sleeping at night? I call this “Safety Margin of Debt”.

For example, You take out a 30-year $200K mortgage at a 5% interest rate, you agree to pay $1,073.64 every month for the next 30 years. A good safety margin for a mortgage is when it takes 1/3 or less of your income. So, if your income is $3000 or more per month, you’re safe. If it’s less than $3000 you should look for another property to buy or another bank with a lower interest rate.

·???????Look around the market for a good interest rate.

-???????Now look at the two pictures above, the difference is 1% in interest rate, but it saves you 6% in your monthly payment and total payment, that’s roughly $37K saved.

-???????If the difference is 2% in interest rate it would save you 11% and so on. It’s now up to you, I’m sure if you look around long enough you will come up with good deals.

How to overcome such situations in the future.

·??????By investing money of others wisely and money which is borrowed from others for some fixed name should be delivered on time to say goodwill of the company.