Evergrande is one of the top 5 largest real estate developer in China (maybe the 2nd largest). Since its founding it has ventured into many other businesses like sports and until recently bottled water. In my view, Evergrande is exhibiting many of the symptoms that brought down the bloated giant companies that existed in the US in the past, namely wasteful spendings, poor capital management, and di-worse-sification.
Out of curiosity I examined the company’s financial reports, and I am absolutely shocked by what I found. Evergrande is a walking corpse, a giant bloated zombie company.
At first glance everything looked fine at Evergrande. The company reported a profit of 7.6 billion RMB in the first half of 2016 (1H16). But a deeper analysis reveals that this profit only exist on paper. In fact, rather than making money, Evergrande’s business operations had in fact lost 12.4 billion RMB in 1H16. Even more alarming is the fact that despite reporting years of profit, Evergrande hasn’t generated a single yuan since 2010, and has actually hemorrhaged more than 120 billion RMB through its business operations since 2010.
Evergrande has also accumulated massive amount of debt. In 2010 the company had 31 billion RMB in debt, a manageable amount for a company the size of Evergrande. But since then debt has swelled to more than 380 billion RMB, of which 172 billion is due in 1H2017. To put that into perspective, Evergrande’s debt due in 1H2017 is 40 billion RMB larger than the company’s entire revenue in 2015.
The only thing keeping Evergrande alive is the fact that the company has been able to borrow more and more money each year. But the only thing lenders are doing at this point is lending money to Evergrande to repay the money they lend to the company in the first place.
I think Evergrande is a perfect representation of the debt trouble that China currently faces and is an example of the zombiefication of the Chinese economy.
There’s even more dirt to this. In January 2016, they have repurchased 127,665,000 shares of themselves at $6.7 per share.
Evergrande is now floating at 5.26.
That’s a 183,837,690 loss here that doesn’t show up on the accounting sheet, because it is just a repurchase and shares were written off. The only one who benefits from this is the biggest shareholder, Hui Ka Yan, who owns 72% of the company.
Take a look at page 27 too. Under assets they have 14,791million accounted for their assets under their ‘investment accounted for using the equity method’. Normally you don’t put your investment portfolio under your asset and balance, but in your reserve capital.
This means Evergrande’s assets are over reported and their debt/losses are under reported
There’s more, like if you scroll down to ‘current assets’, it shows they have 415,098million worth of ‘properties under development’ as opposed to 20,009million worth of property, plant of equipment.
This kind of projected growth is simply unrealistic, seeing that their ‘completed properties held for sale’ is as much as 4x of what they currently own. If you can’t sell, you’re not going to make a profit.