Greedy China Evergrande Likely to Undergo Restructuring Including Asset Sales and Equity Conversion

Evergrande Faces Crisis Due to Reckless Borrowing and Overextended Diversification
Government Likely to Discuss Asset Sales and Equity Conversion Measures

[Asia Economy Beijing=Special Correspondent Jo Young-shin] Hengda Group (hereinafter Hengda), which has fallen out of favor with the Chinese government due to mismanagement, is increasingly likely to become a nominal company through restructuring. Hengda, the second-largest real estate company in China, has been regarded as one of the companies that wrote the Chinese real estate miracle, but the dominant analysis is that it brought on a liquidity crisis due to reckless expansion management through borrowing and octopus-like business diversification.

[Image source=Reuters Yonhap News]

Chinese media analyze that Hengda's crisis is unlikely to spread to the entire Chinese real estate market, but since Hengda's debt problem is difficult to resolve in the short term, there is a growing sentiment that the largest shareholder of Hengda may change through equity conversion and other means.

◆ Belly button as big as the belly, interest burden snowballing = Hengda announced on the 22nd that it would pay interest of 232 million yuan (425 billion KRW) on yuan-denominated bonds maturing in September 2025 on the 23rd. However, Hengda did not mention the interest of 83.5 million dollars (98.7 billion KRW) on dollar-denominated bonds (maturing March 2022) that had to be paid on that day. It is reported that the total interest on dollar-denominated bonds that Hengda must pay this month is 131 million dollars. The interest amount to be paid this month alone amounts to 197.3 billion KRW.

When the Chinese government began regulating real estate last year, Hengda issued high-interest dollar-denominated bonds with annual interest rates of 12-13% from the end of last year. The total scale of these bonds is estimated to be between 10 and 15 trillion KRW.

As of the end of June, Hengda's total debt is estimated at 1.95 trillion yuan (357 trillion KRW). By debt type, financial sector debt (interest-bearing debt) amounts to 571.8 billion yuan (including apartment prepayments and dollar bonds), and current liabilities are 240 billion yuan. Current liabilities are ultra-short-term debts that must be repaid within 2-3 months.

Chinese media Fenghuawang pointed out that Hengda's daily interest burden reaches 300 million yuan, while liquidity is only 86 billion yuan. It also reported that there are as many as 155 financial companies trapped by Hengda's debt.

◆ The path to the downfall of a Chinese real estate tycoon blinded by greed = Hengda's total assets are estimated at 2.4 trillion yuan. Currently, Hengda's total assets still exceed its total liabilities. Hengda's total assets are mainly real estate and real estate development rights (land use rights).

However, since the possibility of Hengda's assets being sold at their true value is very low, there is an analysis that the stake of Chairman Xu Jiayin, the largest shareholder, is likely to shrink. Chairman Xu is reported to hold 78% of Hengda's shares (as of the end of 2019).

If Hengda goes bankrupt as it is, private investors such as apartment subscription holders will have to bear the losses, so the dominant view is that the Chinese government will intervene in the Hengda crisis in some form. The prevailing expectation is that the government will minimize the anxiety of apartment subscription holders through asset sales while ousting Chairman Xu from the market.

It is also possible that local governments in China will be involved in this process. There is a prospect that Hengda, a private company, could be nationalized through local government equity participation (equity conversion). It is analyzed that local governments participating in the private-led real estate market could induce stability in the real estate market.

According to Fenghuangwang, Hengda owns 293 million square meters (88.63 million pyeong) of real estate nationwide and is conducting 778 projects in 223 cities across the country. Given the scale, the Chinese government faces significant political burdens in deciding to declare Hengda bankrupt.

Huanqiu Shibao, citing real estate experts, said that the Hengda crisis will serve as an opportunity to correct the mistaken belief among real estate market participants in the invincibility of real estate, and evaluated that the overheated Chinese real estate market could stabilize due to the Hengda crisis.

This content was produced with the assistance of AI translation services.