The Rise and Fall of China's Evergrande Group

you might have heard something about evergrand group recently this is a sprawling company with billions of dollars in debt a little bit of a cash crunch and is looking for a way out who knows what is going to happen everything is all up in the air and we are hearing new things each day but the whole saga has gotten me interested in how a real estate company has managed to grow so far and so fast that is what we will talk about today in this video we look at the rise and fall of what had once been china's biggest real estate conglomerate a company now with 300 billion dollars in liabilities but first i want to talk for a few moments about the asian-american patreon if you like what this channel does you can support the work by joining the early access tier early access members get to see new videos before they are released to the public there is also a general support tier and signing up for that would be amazing too so head on over to the patreon page and take a look i deeply appreciate anything you'd be able to sign up for thank you and on with the show evergrande's founder and until recently chairman is shu jain he was born in 1958 the son of a farmer and veteran in the second sino-japanese war his mother died of sepsis when he was just eight months old due to the fact that his family had no money to seek medical treatment for her in 1974 at the age of 16 sher graduated from high school the college entrance exams at the time were closed so he set up his first business selling building materials on the street he then worked a series of rural jobs cement factory worker village security officer and tractor driver in 1978 he took the gaucho on his second try and ranked third out of 10 million students in the city of zoko city this granted him entrance into the wuhan university of science and technology where he graduated with honors soon after graduation he met and married his wife yang huaying a woman of similar impoverished background from there he worked at the ghanan wu yang iron and steel company as an assistant director of the heat treatment workshop of the company's steel rolling plant he was responsible for over 300 employees while he managed with an iron fist he paid attention to his workers welfare the workshop's high performance raised his overall profile after 10 years working for the company seven has a director sure left after being investigated for selling scrap metal in his downtime he says he was doing it to clear out the floor and earn more money for his workers i guess i'll believe him sure why not he then joined a trading company shenzhen dongdak group as a salesperson but quickly rising to office director by now it is pretty obvious that shu is a go-getter making an immediate impact he shepherded a steel trading alliance with his former company wu young iron and steel he implemented a double salary system where his top workers get a bonus totaling an entire year's salary and then in 1994 he pushed for zhongda to enter the real estate market with company blessing he set out to guangzhou bringing with him four workers a driver cashier salesman and handyman this all sounds like the start of a profane joke there they developed a real estate project called du dao garden literally meaning pearl island garden they rented fancy hotel rooms to strike deals and posted adverts to attract customers the company implemented a low-cost high-value design that stood out in the market a key differentiation from the massive luxury units being made at the time for the first time premium real estate was accessible to the middle class by mid 1997 just two years after first entering the real estate business pearl island garden made dongda a profit of 31 million dollars yet despite this true still drew a salary of just 450 a month over five times what a civil servant would draw for sure but still far from the value he brought to the company he asked his boss dongda's ceo for a raise but was rejected thus she left to start his own thing he was then around 39 years old in 1997 shu started evergrande evergrand industrial group in guangzhou a real estate company the chinese name like the english one means something that is quote endless from the past into the present end quote with just eight employees shu scoured guangzhou for a prime piece of land to develop he found himself in competition with china's major real estate developers vanki dali and wanda and country garden they were more established with more money and resources to acquire prime pieces of land sure persevered his first project would be a place called jinbe garden built on the site of an old pesticide plant on industrial avenue in the hanzhu district the 110 000 square meter plot as you might guess had issues too many factories a lack of urban infrastructure and a serious pollution problem but for these same reasons shu would be able to acquire the plot at an extremely low price even then however evergrand could not afford the required 5 million rmb down payment but the company did convince the government to allow them to purchase the lot in installments thus began evergrand's lifelong addiction they went to a bank and borrowed they borrowed six million rmb five of that went to the first installment the down payment the last million would be used to kick off construction gen b garden broke ground in june 1997. two months later in august 1997 the first round of housing sales opened up to the public the company sold each unit at 2800 rmb per square meter or about 40 dollars usd per square foot this was below cost it was a sales sensation selling out in just two hours people lined up day and night to buy a house like as if it were an apple product the company made 80 million rmb or 12 million usd in sales giving it their first bucket of gold as they would like to say in chinese evergrande did not waste time almost immediately they began development on 13 other plants in guangzhou simultaneously by 1999 just two years after founding evergrand was guangzhou's seventh largest real estate company they then rapidly expanded refining their internal procedures and business model then in 2006 they began their national expansion deploying 200 employees into wuhan shenyang chongqing and chengdu the goal was to recreate 20 evergrands in just three years at this time the company's balance sheet showed that it had 7.8 billion rmb or 1.2 billion usd in total assets of that it had 6.8 billion rmb or 1 billion usd in debt with jinbe garden and virtually everything else thereafter shu implemented the same business strategy has his first project all the way back at pearl island garden small units in previously file areas price targeted to the middle class and built extremely quickly they build the development in rounds first they sell a lot of debt to raise funds for purchasing land development rights in certain areas they then build and sell as many units to get back their initial investment they might pay back some debt but most sales from each round is then plowed back into more landlocked purchases and more development evergrande's early strategy during these high growth years can be summarized in the slogan san gao yidi which literally means three highs one low the three highs are high debt high leverage and high turnover the one low is low cost the high debt is precarious and it means that evergrand will always be teetering on a razor's edge but without that debt the company cannot acquire its massive land bank and land was the country's fastest appreciating asset at the time so for the most part the company stayed ahead of its debt costs so long has land prices kept rising it is important to note here that when i say liabilities i mean a lot more than just obligations in the form of borrowings like bonds a significant portion comes in the form of deposits from customers down payments for future homes the sheer amount of liabilities can be misleading for instance jpmorgan chase america's biggest bank has something like 3.1 trillion dollars in liabilities internet financial geniuses like to bring up this number in internet forums to scare people the difference between jp morgan and evergrand however have to do with the nature of those liabilities and when they can be withdrawn for jpmorgan chase 2.1 trillion dollars of that 3 trillion are in the form of customer bank deposits they are technically owed to its customers who can withdraw them at any time but most likely that 2.1 trillion will sit in those people's checking accounts which furthermore are backed by the fdic evergrand however is not a bank and customer deposits for future homes are not the same as checking accounts the risk of a force withdrawal is much higher furthermore much of whatever grant owes over 50 percent is classified as current meaning that it might be called upon to be repaid within a year or an operating cycle jpmorgan chase to finish off the metaphor only has 45 billion dollars of current liabilities against this 3.3 trillion dollars in assets so one big risk not the only one mind you is that evergrand comes across a period of time when it needs to cough up cash to pay its current liabilities like you know a financial crisis or something no biggie the 2008 global financial crisis kicked off fears of a real estate crisis in china evergrande found itself in rather turbulent waters at this period of time the company was in the midst of its national expansion they were spending lots of money to acquire valuable plots of land in china's first and second tier cities its land bank had grown nine times over since 2006 but with something like 37 projects in the hopper at the time the company was surprise having trouble coming up with cash flow evergrant at this time owed about 12 to 15 billion rmb a mere 2 billion usd evergrands original plan to pay off this mountain of debt was to take the company public in the hong kong stock exchange but the global financial crisis nixed this and sure scrambled to find the money to pay off the company's debt shru reached out to his friends his first choice wang of van ka turned him down desperate sure then turned to cheongyu-dong of chao typhook group one of hong kong's richest business families the two had dinner and played cards for three months shrew does not speak cantonese and chung did not understand mandarin a familiar situation in many an asian american family gathering going off my own personal experiences i reckon to use hand gestures in between long awkward pauses anyway in the end uncle chang decided to invest over 150 million usd as a lead investor in a pre-ipo 500 million usd investment round to help bail out evergrand other investors include deutsche bank bank of america merrill lynch and the kuwait investment authority it allowed the company to stabilize its business and continue its projects november 2009 the ipo went ahead in hong kong as planned and the shares rose 34 percent on the first day shrew held a 68 stake in evergrand at the time at the company's 70 billion hong kong dollar or 10 billion usd valuation that pegged as well that over 6 billion usd at the end of 2009 evergrand had total assets in the amount of 63 billion rmb or 9.8 billion usd total liabilities of 50 billion rmb or 7.8 billion usd razor's edge but it was clear that sure wanted to build an empire a year after the ipo evergrand spent 100 million rmb or 15 million usd to acquire the guangzhou football or soccer club a member of the chinese super league evergrand stabilized the club's previously rocky ownership situation and brought it great success they won seven straight chinese super league championships then in 2013 the club won the asian champions league title the first chinese team to do so in 23 years during the event evergrande formerly began its move into the consumer goods industry with its mineral water product marketing claimed that evergrand beanchen literally meaning evergrand ice spring came from the deep mineral springs of changbai mountain known in korea has bak ii mountain this sacred mountain straddles the chinese and north korean borders i'm not sure how true this marketing claim actually is but the bottling plan is based in the city closest to the mountain so maybe i don't know if you know this but this mountain is very special to the koreans i did a video about it a few years ago about the history of negotiations between the chinese and the democratic people's republic of korea colloquially known as north korea anyway my point in saying this other than to plug my video is that this is high end water it's kind of like selling water from denali in the united states sure set optimistic targets for ice spring he announced that he targeted 10 billion rmb or 1.5 billion usd in sales in 2014 a year after launch by 2016 they would be selling three times that 30 billion rmb or 4.6 billion usd this was ambitious the brand struggled evergrand attempted to take the business public but outsiders questioned its viability while gross margins were high the brand was not making profit inventory in 2016 evergrand sold its shares in the mineral water business along with a variety of other food products that came along with it the sale brought in about 2.7 billion rmb or 405 million and included the units 3.3 billion rmb or 510 million usd in debt i would consider that an absolute win i guess in mid 2014 sri unveiled a new strategy of diversity plus scale plus brand the goal would be to diversify the company's operations out of real estate it felt like they were trying to put a strategic spin on something they were randomly doing here and there to illustrate three months after the announcement evergrande acquired yen-chen plastic surgery a chain of plastic surgery clinics shear's wife yan huaying was placed in charge of its operations other purchases would follow in early 2017 shrew got up in front of his company employees and told them that he was changing up the way evergrand did business at this time the company had total liabilities of 1.15 trillion rmb or 178 billion usd about the same has the total liabilities of connecticut and massachusetts put together i think who knows for sure with the way they do state accounting nowadays as i previously mentioned the company's previous strategy was three highs one low high debt high leverage high turnover low cost this time sri announced that he would be replacing that strategy with a new one basically a 180 degree reversal sandi or three lows one high low debt low leverage low cost and high turnover the goal was for the company to lower its debt ratios and raise its total net assets this change is in line with recent pronouncements by the chinese government about de-levering the economy it also demonstrates something i have noticed about evergrande sure or whoever he works with has pretty close ties to the government he is likely china's single most generous individual in terms of charity he won the china charity award for eight years in a row contributing more cash to charity than anyone else in each of the years 2018 and 2019 he is estimated to have donated 4 billion rmb or 620 million usd in cash each year mind you that money goes somewhere and it buys you a lot of friends and like with another famous business mogul zawaikwa of ching-hwa unigroup he is not afraid to leverage those ties to sail the winds of trade or fight vicious battles against those who attack him for instance in june 2012 andrew left of american short selling firm citroen research published a report on evergrant claiming that the company was insolvent not a fraud insolvent the hong kong authorities launched a years-long civil case against him in 2016 they banned him from trading in hong kong for five years then in 2019 left lost his last appeal in 2021 left said in an interview that he did not know that sure was so powerful at the time i didn't know any of this i would have never gotten into it he said they must have put him through the ringer the 2017 strategy turnaround kicked off a variety of debt reduction measures the company sold a bunch of assets raised investment funds and paid down a bunch of debt at the end of the year the company crowed about net profits rising 110 to 37 billion rmb or 5.7 billion usd some news reports also crowed that the net debt ratio declined but i took a look into the annual report and total liabilities actually rose from 1.1 trillion rmb or 170 billion usd in 2016 to 1.5 trillion rmb or 232 billion usd total borrowings went from 532 billion rmb or 82 billion usd to 113 billion usd so i am not sure what is the basis for this claim anyway the key point is that evergrand felt that it had sufficiently demonstrated to investors that it could turn a profit now it was china's most profitable real estate company it made the fortune 500 ranking for the first time and so on the whole thing reminds me of amazon from 2000 to 2005 the company turned a minimal profit not exactly losses but very small in relation to its valuation bull said that the company was investing in the future but people had started to doubt if the company could ever deliver on its potential then in 2008 the company began to show rising profits for a few years topping out at over a billion in net income in 2010. it demonstrated to everyone that amazon could indeed make money and they were just investing for the future i think that was what ever grant was trying to do here get itself to a spot where it can tell everyone told you so but the diet did not last long sure had smelled another change in the wind in 2018 the united states effectively crippled the chinese telecommunications company zte with technology export sanctions the event demonstrated the chinese industry's over dependence on american technologies and the chinese government decided to reshuffle its priorities the political winds have redirected and true was there to take advantage in 2018 he announced that he would have ever grand enter the high-tech industry quantum computing ai life sciences and of course new energy vehicles he attempted to acquire the american ev company faraday future but after that fell through he decided that evergrand would go it alone in november 2019 evergrand announced that they would invest 45 billion rmb or 7 billion usd over the next three years to develop electric vehicles the company did not opt to found a brand new subsidiary for this effort instead they used a hong kong listed health company that they already owned evergrand health industry group limited and then renamed it to evergrand auto that company in turn had once been a hong kong listed company called new media group that company published weekly gossip magazines and the like evergram bought them merged them with some hospital chains and evergrand yuenten medical beauty hospital the chain of plastic surgery clinics that i mentioned earlier to create this frankenstein's monster the company still operates those hospitals and medical clinics but now they also are going to try to compete with tesla and like in the evs okay in august 2020 evergrand auto unveiled six vehicles under its hang qi brand sedans suvs and multi-purpose vehicles in the announcement the company said that the first model would hit the market a year later which seems to me a little ambitious a month later the company raised 500 million usd in investment money from 10 cent ride hailing company dd sequoia capital and jack ma's personal investment fund in fen capital evergrand auto struck two more very big deals one with guang huy group the country's biggest automobile dealer to establish a sales network for selling hong hangchi vehicles the second deal was with one of china's state-owned power giants state grid corporation of china to set up a bunch of charging stations nationwide the hong kong stock surged on the back of these news items as well as general stock market ev euphoria in april 2021 the auto subsidiary was valued at nearly 90 billion dollars more than american automaker ford motors at the time this was obviously a bubble in 2020 ford sold 4.2 million vehicles and made 127 billion dollars in revenue evergrand auto on the other hand had not yet even sold one car and was losing billions of rmb each year in the business they made more from plastic surgery than evs they also plowed a bunch of money into production facilities with three bases in shanghai tianjin and guangzhou why three even as it was happening people in the industry thought it was all quote unquote weird eventually people returned to their senses and the stock crashed back down by over 95 percent as part of the group's larger woes this is the perfect time to talk about the red lines the chinese state financial centers have long talked about the possible contagion threats in its financial sector over the past few years ill-advised policy and low interest rates have created massive chinese conglomerates companies like foson group an bang insurance group and of course evergrand now there is nothing financially dangerous about a big company in of itself socially maybe but financially not really take the zaibatsu of japan's past for instance massive conglomerates but their acquisitions and businesses were sustainably funded entirely from their own savings but these chinese mini empires were funded on the back of borrowed money not just loans and bonds that appear on the balance sheet but also secret guarantees and arrangements that do not appear in the financial statements these off-bound sheet situations are a major problem the chinese government decided that it needed to do something about this after interviews with 12 real estate companies two ministries in august 2020 pass regulations mandating something it called the three red lines one a percentage ceiling on the ratio of liabilities to assets of 70 accepting advances from contracted projects two a cap on the percentage of net debt to equity one hundred percent and three a requirement to hold at least one dollar of cash for each dollar borrowed in the short term any real estate company that did not fulfill these requirements would not be allowed to add more debt to their books this is not unprecedented behavior but the punishment could be pretty severe for a company so reliant on growing its way out of bad times evergrants metrics for these red lines at the time when the law was passed liabilities to asset ratio 82 percent bad percentage of net debt to equity 199 percent very bad ratio of cash to short-term borrowings 0.4 oh my evergren wasn't just touching the red lines it took them to prom and got them pregnant in the backseat of a volkswagen beetle sure is very well plugged into the political system but this seems to have caught him and the company off guard after a few weeks he called an internal meeting where he announced that evergrand would slash pricing on its 600ish new builds nationwide by 30 with the goal of achieving sales of 100 billion rmb or 15.4 billion usd each month now the company is not unfamiliar with such discounts in march 2020 during the depths of the pandemic crisis the company discounted its nationwide real estate units by 78 but it is a bad look for everyone involved anyway we need to talk about the letter in september 2020 a chinese website leaked a letter sent by evergrand to the guan dong provincial government the letter is titled report on requesting support for major asset restructuring projects some news sources confirmed the letter's authenticity but the company itself says it is a fake i reckon it is real and the market agrees with me but you can decide for yourself the letter starts by re-emphasizing ever grant's adherence to the central government's real estate price reduction policies and reform it also goes over a brief timeline of events the kind of stuff you need to say before a big ask the letter then casually says that the company's interest-bearing liabilities have reached about 835 billion rmb or 130 billion usd 232 billion rmb or 35.8 billion usd owed to 128 domestic banks the two biggest banks on this list are ming shan bank china's first private bank and agricultural bank of china one of china's big four banks 368 billion rmb or 56.9 billion usd owed to 121 non-banking entities real estate funds and the like it seems the rest owed to various domestic and offshore bonds the report requests the guan dong government's help in coordinating a reorganization of evergrand's various entities the intricacies of that are not worth discussing here but the key point is that if the reorganization is not completed before february 2021 then evergrand needs to pay various strategic investors 130 billion rmb or 20 billion usd and 13.7 billion rmb or 2.2 billion usd in dividends this could trigger a sudden cash flow crunch and place the company's financial health at risk since then it's been a flurry of various news items debt downgrades and the like shares have dropped over 68 percent and the debt has lost over half of its value the company is trying to find someone to give them money everyone is wondering if the government will bail them out the usual evergrants 2020 annual report says that the company has about 1.95 trillion rmb or about 300 billion usd in liabilities you can reduce these liabilities with asset sales and evergrant does have a whole lot of assets 1.9 trillion rmb worth of them on the balance sheet the problem is that much of these assets are in the form of land bank assets or houses under construction and they are not really worth much unless the vendors and construction crews are paid so right now evergrand is in a bit of a bind here there are other concerns too i read about obligations for evergrand wealth management fund products these are high yielding interest products 70 to 80 percent of which are first sold to employees who then resell them to their friends and family taishin notes that there are about 40 billion rmb or 6.2 billion usd of this stuff out there in september 8 2021 two of the company's affiliates missed repayments on these obligations causing angry folks to come protest at evergrand's headquarters screaming stuff like shijayin return my hard-earned money this is pretty bad if there is one thing in china that really pisses off the government that is to cause social unrest five days later evergrand announced repayment of these products through a variety of ways cash if you wait payment in kind as in you get a literal chunk of land or credit for a future payment of a house it goes some ways but of course many investors are still unhappy 6 billion usd is a lot of money and i don't really see it on the main group's balance sheet and that goes to the off balance sheet issue evergrand group has a variety of subsidiaries that stay off the main group's books because the group does not own 51 percent of their stock but they still represent themselves as an ever grand company and their debts are backed by the main group through an unspoken agreement we don't know how much more of that is out there and ron had this same issue with all this turmoil in the media and the financial markets xiujin resigned as evergrand's chairman on august 17 2021. zhao tanglong stepped up as chairman general manager and legal representative the man who holds the seal and it is here where we will end this like i said at the start of the video the ever grand situation is an ongoing event and the story is not over yet more will come out in the future if it does then i'll do a newsletter update for what it is worth i do not think the government is going to bail this company out evergrand is no bank the company will go to court for debt resolution and be slowly broken up like any other as many others have pointed out there are concerns about the effect evergrand's winding down will have on its hundreds of new builds and their real estate markets across the chinese nation but i guess lower real estate prices would be in line with the government's overarching social equality goals right they will get what they wish for and on an absolute level non-performing real estate loans remain low across the overall financial system there's capacity to absorb losses here the bigger question with regards to the off-balance sheet stuff is whether or not state regulators can fence off the damage before it causes a systemic crisis of confidence they probably can the regulators have before handled other massive conglomerates in crisis anbang insurance for instance comes to mind and finally i wonder if shu will face charges for annoying the government with this whole kerfuffle ching hua yuna group's dao wake up a similar situation hasn't yet as of this writing babu xiaohui of unbang insurance has guess we will find out in the days to come so keep your eyes peeled alright that's it for tonight thanks for watching if you enjoyed the video consider subscribing i would like to reach 100 000 subscribers someday and you will get to watch a lot of other videos on this channel that fits your interest want to send me an email drop me a line at john ajnometry.com i love reading your emails introduce yourself suggest a topic or more until next time i'll see you guys later

Channel: Asianometry

Views: 141,010

Rating: 4.9155955 out of 5

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Id: 3GgE_Uzpofo

Length: 33min 3sec (1983 seconds)

Published: Sun Sep 19 2021

Reddit Comments

[u/rxpillme]

This guy did a great job summarizing Evergrande