All you need to know about China's Evergrande crisis

The Evergrande Group of China is in the news globally with many, including India’s Uday Kotak comparing the real estate company’s fall to the Lehman Brothers moment. Markets world over are on tenterhooks with the Indian stock markets being no different. On Tuesday, the Indian benchmarks saw their early gains getting partially eroded amid a weakness in global markets. Here is a primer on the Evergrande Group and why markets are jittery.

 

What is Evergrande Group?


Evergrande Group is China’s second-largest property developer in terms of sales and has a glorious past. In 2019, it was ranked 138th in the Fortune Global 500 list – a list of the 500 biggest global companies in terms of revenue. Earlier in 2013, the company saw its sales exceed 100 billion yuan ($15.5 billion) for the first time ever. It also recorded a 30 per cent average growth rate for five consecutive years till 2014. As per the company’s annual report for the year 2020, it recorded a gross profit of nearly $19 billion while the net profit was around $5 billion.

 

What has gone wrong with Evergrande Group?


As per the company’s financial filings, it has a debt of around $304 billion, which includes borrowings, contract liabilities, trade payables along with current & deferred income tax liabilities. The company also said that some payables related to property development were overdue and hence work has been suspended on some projects.

More importantly, in a statement issued on September 14th, the company stated that it “expects significant continuing decline in contract sales in September” that would lead to “continuous deterioration of cash collection by the group which would in turn place tremendous pressure on the group’s cashflow and liquidity.”

 

Last week, there were reports suggesting that China has told the lenders of the company that Evergrande will not be able to make the interest payments scheduled on Monday.

 

What is the company saying?


On September 14th, the company said that it is looking at selling assets and is also in discussion with potential investors but, more importantly, added that there has been no material progress on the sales talks.

 

“… the Group has not entered into any legally binding agreement with any investor. It is uncertain as to whether the Group will be able to consummate any such sale,” said a company statement.

 

It further raised concerns by stating that the sale of its office building in Hong Kong has not been completed within the stipulated time frame and that two of its subsidiaries “failed to discharge their guarantee obligations as scheduled for the wealth management products issued by third parties” with the amount at stake pegged at $144.5 million.

 

“Shareholders of the Company and other investors should note that it is uncertain whether the Group could successfully implement the measures to ease the liquidity issues as mentioned in this announcement. Shareholders of the Company and other investors are reminded to exercise caution when dealing in the securities of the Company,” it concluded.

 

How is the company stock behaving?

 

Shares of Evergrande Group are currently hovering around HK$2.20 – a price, which is a fraction of what it was in the company’s heydays.

 

The best phase of the company was in 2017 when the stock rose from around HK$5 to nearly HK$32 in a span of just 10 months. The massive surge made the company’s founder Xu Jiayin feature among the richest people in Asia at that time.

 

The stock did have a volatile run on the exchange for the next couple of years but managed to stay above the HK$20 mark for most part before registering a steady decline starting July 2020 when it was trading around HK$24 apiece.

 

From a high of HK$25.80 touched in July last year, the stock fell to below HK$15 by the end of 2020. In the current calendar year, the stock has lost nearly 85 per cent or around HK$12 per share. The pace of fall has only aggravated in the recent past with the last one month seeing a slide of nearly 50 per cent in the stock price.

 

How have global markets reacted?


Most of the leading equity benchmarks dipped on Tuesday amid a volatile session over concerns related to Evergrande Group and the ensuing impact it could have on the Chinese economy – the second-largest globally – and also global economy in toto. While some of the markets were able to partially recover from the losses, the undertone remains brittle. Investors are speculating on whether the Chinese government will help bail out the company, whose fall will undoubtedly impact the global economy.



Evergrande has a debt of around $304 billion

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