Evergrande Downfall to Take Markets, Economy Along as Millions Hurt

The nation's top creditor is about to default and take the economy with it. Without government intervention, the stock in Evergrande will hit rock bottom. CW looks at some top backers of Evergrande that will hurt in the collapse.
Sep. 18, 2021 00:01
Evergrande Downfall to Take Markets, Economy Along as Millions Hurt

(CapitalWatch, Sept. 17, Hong Kong) Bad news for China Evergrande Group (HKEX: 3333; OTC: EGRNF) came in waves over the past few months – and now, it's down to the real estate giant's potential collapse.

Wealth management products recently sold by Evergrande Wealth have gone unpaid. The funds are now difficult to redeem, according to Liang Du, managing director of Evergrande Wealth, who also said that the company's balance of wealth management products has surpassed 40 billion yuan. Buyers of Evergrande properties have taken to the streets in protest to the company's Shenzhen and Guangzhou headquarters, Nanchang, Jiangxi, and Henan, and other places, demanding their money.

China Evergrande Group, an investment holding company, operates China's second-largest property developer, and the conglomerate spreads across property construction and management, hotel operations, finance including investment and wealth management, internet sector, and healthcare industries. It is China's largest high-yield dollar bond issuer, holding 16% of the nation's outstanding notes, according to Bank of America analysts.

Over 70,000 retail investors have brought their savings to the giant, expecting returns of 10% or more, as Bloomberg reported. And along with the investors and property buyers who took to the streets, the crisis at China's real estate titan is hurting major movers as its assets collapse. Backers in Evergrande include local governments and municipal entities, tycoon investors and entrepreneurs, Chinese tech giant Tencent Holdings, as well as some celebrities. In other words, it's people and entities who are key players in the nations' economy.

The effect of Evergrande's downfall may be severe: with so many parties involved, it's the entire economy that is bound to feel the blow. As Bank of America analysts said, its collapse would push the default rate on high-yield (junk) dollar bonds to 14% from 3%.

Vice Chairman 'Depressed'

A Hong Kong surveyor, close to Evergrande, told CapitalWatch that Haijun Xia, the vice chairman and president of the company, is "depressed." The analyst said Xia tried to sell his flat in The Pavilia Hill that he bought just two years ago from New World Development Co. (HKEX: 0017; OTC: NDVLY) for HK$156 million, but there were no buyers. Last month, Xia reduced his holdings of China Evergrande New Energy Vehicle Group (HKEX: 0708) by 3 million shares at HK$14.18 and his holdings of Evergrande Property Service (HKEX: 6666) by 10 million shares at HK$7.30, cashing out about HK$116 million overall. Xia invested 550 million yuan in Evergrande Property Services before it went public in August last year, when it was worth was HK$8.38.

According to the 2020 annual report and the company announcements, Xia held $78 million of China Evergrande bonds, 11.7 million shares in China Evergrande New Energy Vehicle Group, and 55.8 million shares in Evergrande Properties. He has also invested HK$500 million in unlisted Fangchebao Group, a house and auto marketplace controlled by Evergrande. In the financial crisis, the price of related listed assets plummeted. It is safe to assume that Xia has suffered severe losses and is facing a liquidity crisis.

Too Many Parties Hurt in Crisis

The crisis detonated from a cross-default is hurting a group of insider investors, local governments, and some celebrities in China.

CW investigation found investments of HK$46 billion from government-related entities, among them the municipal government of Guangzhou, where Evergrande is headquartered, as well as Shenzhen.

The Shenzhen Talent Housing Group and Shenzhen Holdings (HKEX: 0604) have invested 25.5 billion yuan (HK$30.6 billion). Guangzhou City Construction, a state company, invested 10 billion yuan. CITIC Capital (NYSE: CCAC), a subsidiary of CITIC (HKEX: 0267; OTC: CTPCF), backed Evergrande Property and Fangchebao in the amount of HK$4 billion.

The collapse also affects the billionaire poker club, known locally as the "Big Two Club" for the real estate magnates' love of the Chinese big two game. These included three investor groups, who altogether invested around HK$100 billion into Evergrande. When the indebted conglomerate suffered in 2020, these were the people who helped chairman Ka Yan Hui (Jiayin Xu) by stocking up on Evergrande's bonds.

The first investor group was Cheung Chung-kiu and affiliates. Many listed companies under Cheung, including C C Land (HKEX: 1224), Cross-Harbour Holdings (HKEX: 0032), and related parties, such as Asia Orient (HKEX: 0214) controlled by Poon's family, and the CST Group controlled by Tao Chiu (HKEX: 0985), Yongge Dai, chairman of Dili Group (HKEX: 1387), and Far East Holdings International (HKEX: 0036), a listed company related to Kingston Financial Group (HKEX: 1031), reportedly invested HK$40 billion in Evergrande.

Another investor group from "Big Two" is the family of Joseph Lau. Lau and his wife Hoi-wan (Kimbee) Chan have been supporting the development of Evergrande through China Estates and Lifestyle International (HKEX: 1212). They held almost HK$20 billion of Evergrande shares and bonds, including equity of Evergrande Property and Evergrande New Energy Auto (HKEX: 0708).

Further, Lau's former right-hand man Han-man Hung, through his company Get Nice (HKEX: 0064), also participated in Evergrande's Hong Kong projects, including a HK$100 million debt investment in Emerald Bay. Chuang's Consortium (HKEX: 0367) also owned a small amount of Evergrande bonds.

The last of the three groups was Chow Tai Fook associates. Chow Tai Fook Enterprise (HKEX: 1929; OTC: CJEWY) and New World Development invested in China Evergrande's at the early stage. They injected capital in exchange for bonds and equities. They also invested in Evergrande property and Fangchebao, and hold equity in Evergrande's Shengjing Bank (HKEX: 2066). The sum is estimated to be as much as HK$18 billion.

Naturally, Evergrande employees are also suffering major losses. Zhongming Wang, a former employee, invested HK$6.03 billion in Fangchebao and HK$5 billion in Evergrande Real Estate. Wang also held 5 billion yuan in Evergrande New Energy, plus about HK$2.2 billion in Evergrande's grain, oil, dairy, and mineral water business. These add up to a combined HK$20 billion.

Kaiguo Wang, the general manager of Fujia Group who had a close relationship with Evergrande, invested HK$5 billion in Evergrande New Energy Auto. He once mortgaged the assets from Anbang Insurance at Evergrande's Shengjing Bank.

Big investors from Shenzhen, Guangzhou, and Macau also took a hit. Tech giant Tencent (HKEX: 0700; OTC: TCEHY) holds stakes in HengTeng Network Group, Evergrande New Energy Auto, and Evergrande Property. JMC Capital and Hopson Development (HKEX: 0754), established by entities of Guangzhou-based Agile (HKEX: 3383), also owned Evergrande's assets. Close to HK$14 billion was involved.

Macau businessmen Wai Sheun Or and Ho Man Lin (i.e. Joseph Lin), the latter a suspected member of the Cheuk-chiu Lin family, also invested in Evergrande but the amount was relatively minor, at HK$3 billion.

Slim Chance of No-default

These are just a few parties that will be hard-hit by Evergrande's default. As Evergrande approaches bankruptcy, its shares and other assets will be devalued significantly, which may cause many to face financial difficulties – and eventually trigger a domino effect hurting the broader economy.

Evergrande holds about twice the assets of Lehman Brothers before the U.S. investment bank's collapse in 2007-2008, and investors will remember the market crisis. The $300 billion debt mentioned in U.S. media outlets including Bloomberg and CNBC only covers Evergrande's real estate businesses, but the conglomerate's actual assets spread across industries and count China's largest soccer club and stakes in several electric vehicle makers. Reports in late August showed Evergrande will look to withdraw from automaking after the unit's breakneck growth. And its other units may face a similar fate to avoid being taken down with the parent.

Some analysts predict a near-100% possibility of collapse at Evergrande. The bond yield of Evergrande indicates that there is only 3-5% chance that it will not default.  

On Friday in New York, the OTC-traded stock in Evergrande surged 13% to 40 cents a share. In Hong Kong, Evergrande closed at HK$2.54 a share, down 3%; year-to-date, its shares are down 82%. Their level will go lower yet – unless Beijing interferes now, the company's market value will hit zero. And this year has shown that no Chinese giant is "too big to fail."

(Anna Vod contributed to this article)