The billionaire chairman of the world’s most indebted developer, China Evergrande, has admitted his company faces the risks of defaulting on loans and legal action from creditors.
Hui Ka-yan, who founded the Shenzhen-based home builder in 1996, made the rare admission in an earnings statement on Tuesday as Evergrande reported a dramatic plunge in profits. The high-profile tycoon also revealed that construction work had been halted at some of the developer’s projects.
“The group has the risks of defaults on borrowings and cases of litigation,” said Hui.
Evergrande, the biggest construction company in China by sales, admitted that billions of yuans’ worth of repayments related to property development were overdue and that building work at some of its housing projects had been suspended as a result.
“The group will do its utmost to continue its operations and endeavour to deliver properties to customers as scheduled,” Hui said in the filing.
Perhaps tellingly, he did not meet the media for an interim results briefing, as would usually be the case.
Evergrande could sell property units to suppliers and contractors to offset some of the outstanding payments, the filing said.
The troubled developer posted a 29 per cent drop in first-half net profit on Tuesday.
Interim profit came in at 10.49 billion yuan (US$1.62 billion), while revenue in the first six months dropped 17 per cent to 222.7 billion yuan from a year earlier, according to the half-year results.
Evergrande is rushing to sell assets to repair its balance sheet after years of rapid expansion which saw it move into producing electric vehicles, property management and health care services. It even sponsors Guangzhou Football Club in the Chinese Super League.
Evergrande has said previously it was in discussions with third parties to sell its stakes in its electric car and property management units.
It is also seeking to sell the 26-storey China Evergrande Centre in Wan Chai that serves as its headquarters in Hong Kong to mainland peer Yuexiu Property, Bloomberg reported last week.
The company said in Tuesday’s statement that if its efforts to reduce debt did not work, its “liquidity issues may deteriorate, which may result in defaults on borrowings, and litigations that may have a material adverse effect on the group.”
The People’s Bank of China and the China Banking and Insurance Regulatory Commission issued a joint statement on August 19 saying they had summoned top executives from Evergrande and had urged them to “actively diffuse debt risks”.
The company’s interest-bearing liabilities had fallen by a third to 571.8 billion yuan by the end of June from last year’s peak. That was enough to turn Evergrande to “orange” from “red”, as it managed to drag itself within one of three “red lines” set out by Beijing in a deleveraging campaign.
Its net debt-to-equity now stands at 99.8 per cent, according to the Beike Research Institute, successfully meeting the central bank’s cap of 100 per cent.
Its debt-to-asset ratio, excluding advance receipts, is at 81 per cent, still well short of Beijing’s cap of 70 per cent. Its cash reserves of 0.67 times its short-term borrowings also failed to achieve the requirement of “carrying short-term borrowings at no more than cash reserves”.
The future for the beleaguered home builder looks no less bleak, said Ivan Li, fund manager at Shanghai-based Loyal Wealth Management.
“The outlook for Evergrande is pretty pessimistic. The best outcome for Evergrande now is just to survive, not with promising growth. Plus, the government is apparently trying to cool down the entire property market,” said Li.
“At this moment, it is just impossible for any rational investor to say Evergrande is worth buying.”
Shares of China Evergrande Group fell 0.68 per cent to HK$4.36 on Tuesday before the results announcement.
