Evergrande, the embattled Chinese real estate developer, narrowly avoided default last week by paying $83.5 million in overdue debts and restarting previously halted real estate projects. The Chinese government shows no hint of stepping in, but Evergrande Chairman Hui Ka Yan has more ambitious plans, signaling last Friday that the firm wants to move away from housing and focus on making electric cars.
Apparently, holding $300 billion in liabilities and sinking deeper into a debt crisis is not enough to shake the chairman's entrepreneurial spirit. Not even the encroaching deadline for a $47.5 million interest payment (due this Friday) could make this real estate giant buckle under pressure. Last Friday, Hui stated he wants to make electric vehicles the main business within the decade, according to reports from Chinese state media.
However, the subsidiary responsible for this segment of the company, China Evergrande New Energy Vehicle Group, has yet to deliver a single car. According to a statement by the president of the electric vehicle unit, Yong Zhou Liu, the company will deliver it’s first car by 2022.
This new business venture was described to reporters of the Wall Street Journal as a cross between happenstance and a last-ditch effort. Hui attended a private dinner hosted by billionaire entrepreneur Jack Ma, where he humbly introduced himself as a car salesman. At the time, Evergrande was just weeks away from a potentially devastating showdown with its creditors.
Other guests in attendance couldn’t tell whether it was desperation or blind confidence that caused Hui to pitch his audacious new venture: a new electric vehicle company that will blow Tesla Inc. and others out of the water by becoming the “world’s largest and most powerful” EV maker by 2025. This wild fusion between car-making and property development must have enticed Ma, because the Evergrande New Energy Vehicle Group (Evergrande Auto) saw it’s capital grow last month to roughly $87 billion, according to the WSJ.
Evergrande Auto was given four times the capital of its parent company, even surpassing most global automakers, including Ford Motor Co. and General Motors Co., all without having sold a single vehicle.
Another Chinese media source, The Paper, revealed that increasing the company’s registered capital is a way of showing the world that Evergrande’s credibility can improve. It is also conducive to the company’s new investment projects. However, the source warns that the larger the registered capital, the more responsibility and risk the company bears.
Typically, electric-car makers burn through billions of dollars to create the perfect production model, but Evergrande states that it’s building 14 of them at once. They are also starting to build multiple factories, although the company does not have any industrial or technical background.
In an effort to sell off their assets and pay their debt, last Sunday Evergrande announced it had resumed work on more than 10 projects in six cities, including Shenzen. Although the company did not disclose how many of its 1,300 property projects were halted, it admitted projects were previously stalled at the end of August due to delays in payment to suppliers and contractors. According to state media, Hui assured that the company would get back on track by restarting work and resuming sales, allowing the developer to repay suppliers, investors, and financial institutions.
Last Friday, Evergrande was able to make an $83.5 million interest payment on an offshore bond after being given a month-long extension. These bondholders include the likes of BlackRock, HSBC, and UBS. This has bought the company another week to continue fighting the looming debt crisis over the world’s second-biggest economy — that is, until another $47.5 million interest payment comes due this Friday.
Other efforts are being made to reduce the company's expenses. According to state media, the core management team took the initiative to suspend wages and force employees to move from their office buildings to factories. The company states they are committed to maximizing possible cost reduction, where everyone must make sacrifices, including the chairman himself.
Hui holds 10.2 billion shares of Evergrande, equating to a 77% stake in the company. Recently, his shares have crashed from more than $20 billion to $3.5 billion. Yet, even if his shares dropped to zero, his dividends alone would make him one of the 100 richest people in China, according to Forbes.
Shares of the Evergrande Group shot up 4% on Monday, after the announcement on Sunday to prioritize the growth of its electric vehicle business. China Evergrande New Energy Vehicle Group Ltd stock jumped 17%, compared to a 0.3% fall in the Heng Seng Index.
Evergrande's financial woes are far from over, and still threaten to collapse the wider Chinese financial system. Although state media outlets are mostly positive about controlling the spillover effect, the central bank governor Yi Gang reported last week that property companies were debt default issues due to poor management and a “failure to adjust to market changes.”
