Chinese version of Lehman Brothers｜ Evergrande Group is on the verge of bankruptcy?! ｜What should we do as investors

"I'll post a piece of news for you, you should be interested."

When I got off work, my colleague passed me a news website and casually talked about the fact that China Evergrande Group is in debt crisis and may be at risk of bankruptcy.

I was still chatting about other topics, but it suddenly turned into such a serious conversation. I couldn't stand it. I didn't quite understand what the Evergrande Group was and why I was interested. I just went in and thought about it. The page that pops up is that PTT villagers are discussing this problem that seems to have existed for a long time. The bottom part of the message is a light comment, thinking that China will not let the leading real estate group go bankrupt so easily, or it is the Chinese version of Lehman. Brotherhood is going to happen again and so on, and I'm at a loss, with clueless information pouring in.

So I decided to collect information step by step, and wanted to look at this matter with the thinking logic of a novice investor, starting from getting to know Evergrande Group, understanding China's current "three red line policies" for the housing market, and the evaluation of Evergrande ratings by various credit rating companies. Downgrades, and what should we investors pay attention to.

Evergrande Group

To get to know a company, some people use the Internet to check other people's reviews, or simply go to Wikipedia to browse the information compiled by others. I like to go directly to the official website. The information in it is open and clear, and there will be The value and core set by the group itself can best see the operating policy of a company.

In the introduction, it can be seen that Evergrande Group has touched a wide range of fields, such as its own various industries such as Evergrande Real Estate , Evergrande New Energy Vehicles, Evergrande Property, Hengteng Network, etc. China must be a very large-scale company, especially since he is the first to focus on real estate, and he also emphasizes that it has huge holding projects in many cities, which is absolutely extremely important in the real estate field , and this rumored crisis may shake it. The development of China's housing market even affects other related industries.

However, on the official website, Evergrande has a special statement related to this rumor.

 📢 Statement that the recent remarks on the Internet about Evergrande's bankruptcy and reorganization are completely untrue. The company has indeed encountered unprecedented difficulties at present, but the company resolutely fulfills its main corporate responsibility, goes all out to resume work and production, guarantee the delivery of buildings, and does everything possible to restore normal operations and fully protect the legitimate rights and interests of customers.

- Release time: 2021.09.13

It seems that the recent rumors have really made a splash, and even the company has had to issue a statement to quell investor concerns.

Three red lines policy

In fact, many years ago, Chinese officials have announced the launch of the "Three Red Line Policy" for developer financing.

• The asset-liability ratio after deducting advance receipts shall not exceed 70%
• The net debt ratio shall not exceed 100%
• Cash-to-short-term debt ratio must not be less than 1

Among them, the companies that exceed the three red lines include the Evergrande Group that we are talking about today. At the beginning, China’s policy was to prevent the risk of overheating of the housing market , and to restrain real estate developers from using too high debt ratios and too little capital. The resulting high leverage, because the current Chinese real estate adopts the strategy of " borrowing more, building more, and expanding the scale " to rapidly expand the market and achieve uninterrupted cash flow. However, this policy has led to The underlying risks are exacerbated.

After all, if these real estate companies want to improve their debt ratio, they must find a way to sell their properties first in exchange for more cash to solve the high debt caused by financing, but how can real estate be released from the market so quickly? The rush to sell will lead to a collapse in house prices, which is more than worth the loss. In addition, under the current epidemic situation, the demand for housing has decreased, which may cause the previously high housing market to decline all the way.

Fitch downgrades Evergrande Group

In fact, as early as September 8, the credit rating company Fitch has quietly lowered the long-term foreign currency issuer default rating of China's Evergrande Group and its subsidiaries from "CCC+" to "CC". Those who are interested can go to the following I found this article on Fitch's official website , and went through all the reasons for the downgrade . Read on for the company's liquidation value that follows.

 Evergrande Group disclosed in its semi-annual report in the first half of 2021 that due to its failure to alleviate the liquidity problems it is currently facing, including through aggressive sales of houses, granting loans, disposing of assets or introducing new investors, the company may facing debt default. Leverage, as measured by net debt/adjusted inventory, has fallen to 27% from 35% in 2020, but this has not relieved tight liquidity conditions.

It can be seen from the article that even if Evergrande Group increases its strength in selling houses, lending, or disposing of assets , trying to recover the high debt ratio accumulated over the years , the leverage ratio has indeed dropped from 35% in 2020 to 27%, but it is still The fundamental liquidity problem cannot be relieved. After all, it is difficult to completely reverse it in a moment. Coupled with the news of such a debt crisis, many creditors have come to the door to get the previous account first , which will make the cash flow even more difficult. The risk of debt default is bound to rise, and it is no wonder that credit rating companies such as Fitch will downgrade the score of Evergrande Group.

In addition, on the official website of Evergrande Group, I inquired about the latest announcement of investor relations on 2021.09.14— inside information

 The Group expects that the contracted sales of properties will continue to decline significantly in September. As disclosed in the operating data announcement, the contracted sales of properties of the Group in June, July and August 2021 were RMB 71.63 billion and RMB 43.78 billion, respectively. RMB 38.08 billion, showing a downward trend. September is usually the peak of property contracted sales in China's real estate industry. However, as the continuous negative news reports on the Group have seriously affected the confidence of potential homebuyers, the Company expects that sales in September will continue to decline sharply, resulting in the continued deterioration of the Group's sales receipts, further reducing cash flow. Flow and liquidity create enormous pressure.

Even Evergrande officials have confirmed that their sales are indeed declining, resulting in huge pressure on cash flow and liquidity, because even if such news can be hidden for a period of time, when the release time of the financial report arrives, from the data. If you can still guess the situation the company is facing now, it is bound to come out and explain the situation.

 Other measures taken to alleviate liquidity problems have not achieved the expected results. As disclosed in the interim results announcement, in order to alleviate the liquidity problems of the Group, the Group is actively contacting potential investors to discuss the sale of interests in members of the Group and other assets.
1. Significant progress has not been made in the sale of the interests of members of the Group. The Group is actively approaching a number of potential investors to discuss the sale of some shares in China Evergrande New Energy Automobile Group Co., Ltd. and Evergrande Property Group Co., Ltd. and other subsidiaries to bring in new investors. As of the date of this announcement, the Group has not signed any legally binding agreement with investors, and it is uncertain whether the above-mentioned sale can be realized.
2. The sale of the Company's office building in Hong Kong was not completed as expected

The announcement also specifically put forward Evergrande’s coping strategies, but it can be seen that the measures taken have not achieved the expected results. There is no definite agreement signed on the sale of shares, and the sale of the building has not been completed on time. It's really hard to be reassured.

What should investors pay attention to

After analyzing the issues that are generally mentioned in the news reports, we finally have to return to the ultimate question of our investors, what should we pay attention to, and what are the ways to avoid this wave of turmoil.

Taking me as an example, the investment assets currently purchased, whether it is funds, stocks, bonds, ETFs, all include investment projects in China at a relatively small ratio, so the impact is very small, so don’t worry about it, but some people may buy Asian If you are a high-yield fund or a China-related ETF, you should pay more attention to the underlying assets contained in it, and you should pay attention to the real estate-related stocks , because it is not only Evergrande that will face liquidity risks. It is already influenced by China’s policy. In addition, Evergrande’s subsidiaries and related companies must be careful . After all, the fields that Evergrande has entered are too diverse and extensive, and it will affect not only the housing market.

At present, it seems that the Evergrande Group incident may continue to spread. As investors, we really need to be extra careful. Originally, the problem of the failure of a single company may expand to China's economic development. It may even become a Chinese version of an exaggeration. Lehman Brothers affects the ups and downs of the global economy, but I silently believe that the Chinese government should not let such a large-scale company go bankrupt. I hope there will be a major turnaround.

Today’s economic development is no longer simply limited to domestic development. Every move of other countries affects each other. It is really necessary to observe a lot and occasionally listen to the latest current affairs. Maybe you will find a crisis or turning point in advance, and make an early appearance or layout.

Today, I will share this news for your reference, and welcome to leave a message to tell us your views on this incident.