China Evergrande’s total liabilities swell to $410 billion

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HONG KONG – On the face of it, China Evergrande Group made progress cutting its debt load in the first half of the year. On closer examination, paying its dues got even harder.

Evergrande’s total liabilities including bills owed to suppliers rose to 1.97 trillion yuan (S$410 billion) as of June 30, near a record high, results showed on Tuesday (Aug 31).

While its borrowings shrank to 572 billion yuan, the group’s cash and cash equivalents plunged to a six-year low.

The upshot: Evergrande will need to accelerate asset sales and continue to aggressively discount apartment prices to generate enough cash to meet its obligations. The world’s most indebted developer is all too aware of what’s at stake, saying it risks defaulting on borrowings if its all-out effort falls short.

“Now it’s at a critical point,” said Chuanyi Zhou, a credit analyst at Lucror Analytics. “If asset sales and introduction of new investors don’t progress well and meet the government’s expectation, a default is likely to happen, possibly followed by an out-of- arrangement with creditors.”

Evergrande said it’s exploring the sale of interests in its listed electric vehicle and property services units, as well as other assets, and seeking to bring in new investors and renew borrowings.

Sharp discounts to swiftly offload apartments cut into margins in the first half, helping push net income down 29 per cent to 10.5 billion yuan, in line with an earlier profit warning.

“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” the Shenzhen-based company said in the statement. “Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group.”

Evergrande’s 8.25 per cent dollar due in March fell 1.1 cent on the dollar to 43.7 cents on Wednesday morning, according to Bloomberg-compiled data, on pace for a fresh record low.

Its shares fell as much as 2.5 per cent in Hong Kong, taking this year’s decline to 71 per cent. “Evergrande’s gross margin could compress further on the potential fire sale of its properties,” said Bloomberg Intelligence (BI) analysts Patrick Wong and Lisa Zhou.

The gauge of profitability is the lowest among major developers tracked by BI due to aggressive promotions and price cuts, they wrote in a note.

With banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China’s economy, raising questions over whether it might state support.

Regulators urged Evergrande to resolve its debt woes in a rare public rebuke earlier this month. Evergrande said some property development payables were overdue, leading to the suspension of on some projects.

The company is negotiating with suppliers and construction contractors to resume the work, it added.

“The group will do its utmost to continue its operations and endeavor to deliver properties to customers as scheduled,” it said.

Evergrande’s trade and other payables climbed 15 per cent from six months earlier to a record 951.1 billion yuan, the results showed.

The company still falls short on two of China’s so-called three red lines – metrics imposed on developers as part of a on leverage in the industry. It has pledged to meet all three by December 2022.

One measure – the ratio of cash to short-term borrowings, a gauge of liquidity – worsened in the period to 36 per cent from 47 per cent at the end of last year, as its cash and equivalents plunged to the lowest in six years, Bloomberg calculations based on the results show.

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