Last week, we looked at the Evergrande Crisis and try to see how far can this crisis go. Today, let's talk about the company itself, Evergrande. I read the report that activist short seller Andrew Left from Citron Research wrote 10 years ago warning us about Evergrande. At the time, the liabilities were only $12 billion, and today, they are over $300 billion. Some of the issues were solved but some are still here and got amplified.
Since China is a Communist country, only the government owns land in China. The government only rents the land to the developers and they build it and sell it to the people. There has been a boon in the Chinese real estate market in recent years mainly for cultural and also financial reasons. This was a boon to the business of Evergrande, which took massive loans to build these properties.
In Andrew Left's report, he talked about fraudulent accounting. This is over now as the government intervened and Evergrande is audited by PwC and their 2020 financial statements were considered to be true and fair. However, Evergrande still made use of some misleading accounting to make numbers look better. For example, all their properties under development are classified as current assets (allowed in Hong Kong), showing more liquidity than they actually have. Besides, they sell their properties at inflated prices and these are added to their balance sheet. All of this is legal but misleads investors.
Evergrande CEO and Chairman Xu Jiayin (Hui Ka Yan), who owns about 70% of Evergrande, had many pet projects which were not really good for Evergrande's main business overall.
Of course, the main issue with Evergrande is the massive debt and interest payments. The Government has also put more regulations on highly leveraged companies in China with a growing corporate debt bubble.
Is Evergrande Too Big To Fail? Will it go bankrupt? It is better to wait and see. Probably they will have some restructuring but for now, it is better to just stay away from it. But this situation is certainly creating new opportunities in China.