Evergrande’s Endgame Choices: Partnerships, IPOs, Fire Sale

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China Evergrande Group’s billionaire founder Hui Ka Yan has a big problem. With the property developer’s dollar bonds trading at distressed levels, a restructuring of his real estate conglomerate seems almost inevitable. 

It’s not as if Hui hasn’t undertaken major makeovers before — rapidly. Within days of a cash crunch last September, he convinced his long-time investors to turn into equity 86.3 billion yuan ($13.3 billion) worth of hybrid securities, thereby averting a debt crisis. The only surgery carried out was on Evergrande’s capital structure. Hui’s actual business empire remained intact and he continued to sit in the driver’s seat. 

But the ongoing credit emergency runs much deeper. Regional banks and provincial governments are skittish about Evergrande now. Its relationship with suppliers is increasingly tense. It looks more and more like a restructuring will have to take place. How might the endgame play out? Could Hui lose his empire?

Let me offer a few observations ahead of the company’s board meeting on July 27, during which a special dividend will be discussed.

Hui can’t count on his business associates this time. Billionaire Zhang Jindong, a supplier who helped Hui last fall by waiving his right to a 20 billion yuan ($3 billion) payment, recently ceded control of his electronic retailer Suning.com Co. Ltd. Instead of paying down his own debt pile, Zhang was overly generous — and lost his crown jewel as a result. Self-preservation should be lesson No. 1 for any entrepreneur. 

Instead of looking up and down his supply chain, Hui might have to hold his nose and look horizontally to his property development peers. After all, he has built the nation’s second-largest real estate business. Evergrande has a lot of projects it can sell off to raise cash. 

Other troubled conglomerates have pursued similar strategies before. In 2017, billionaire Wang Jianlin’s Dalian Wanda Group Co., HNA Group Co. and Anbang Insurance Group Co. were swept away by Beijing as it reined in their global shopping sprees. Wang managed to save Wanda from bankruptcy by selling his hotels to Guangzhou R&F Properties Co. and his tourism and theme park projects to Sunac China Holdings in a deal that brought him $9.4 billion.

So far, however, Hui seems reluctant to part with his prized possessions. Evergrande vehemently denied social media rumors that rival developers state-owned China Jinmao Holdings Group and Shenzhen-based China Vanke Co. are looking at its assets in the lucrative Greater Bay Area, of which Hong Kong is part.  

Instead, Evergrande has been cozying up to big state-owned enterprises lately, as if to show that it still has good connections in Beijing. Last month, the company signed a strategic partnership with oil giant China Petroleum & Chemical Corp. to develop EV charging stations, a deal that rings empty because Evergrande’s electric car division has yet to roll out a single vehicle.

Everyone is smelling blood but Hui does not want a fire sale. But he has to face up to the fact that getting a billion-dollar deal — or whatever amount it takes to save his company from restructuring — takes time. Private businesses have to be accountable to their shareholders; even SOEs need to go through lengthy state approvals to allocate investment funds. He needs to move quickly or else it will be too late. 

Case in point: In early November, Evergrande struck a deal to sell a 41% stake in a non-core subsidiary to Shanghai-based energy infrastructure SOE Shenergy Group Co. for 14.9 billion yuan. Evergrande sold at cost but the deal is still not closed. The holdup is a pending approval from the Shanghai government, which asked for more due diligence and paperwork, Debtwire reported in early June. The cash has not yet been deposited in Evergrande’s bank accounts.  

To contain the damage, Evergrande has been talking up possible initial public offering of its bottled water and tourism operations. But Evergrande has been doing this for a while. In May, it sold a stake in its much-hyped electric vehicle unit; its property management arm got a public listing last December. The moves did not stop Evergrande from sliding into the ongoing cash crunch. Why would the listings of its less visible units help? 

A company can retire debt with money raised from minority share sales, or by selling existing assets. Hui is doing too much of the former, not enough of the latter. Come on. You learn this in Corporate Finance 101.

He can take a lesson from Wang (both of them were at different times China’s richest man). It was probably painful for Wang to part with his assets. But four years on, his Wanda is still alive. This year, it struck gold with the meme stock mania in the U.S., profiting from investments in AMC Entertainment Holdings Inc. Wanda’s commercial property management unit is now gearing up for a $3 billion Hong Kong IPO. Wang is making a comeback. 

As Evergrande quickly descends into distress, Hui must race against the clock. He has a choice of billionaire precedents to heed. Will he go the path of Suning’s Zhang or Wanda’s Wang?  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2021 Bloomberg L.P.

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