How to Turn Negative Equity Into a $30 Billion Market Cap
A motorcyclist and his passengers ride past the under construction Evergrande International Hospital, in Boao, China, March 25, 2017. (Photographer: Qilai Shen/Bloomberg)

How to Turn Negative Equity Into a $30 Billion Market Cap


For weeks, those of us in Asia watched the U.S. stock frenzy with amazement — how a video game-like trading interface could lure millennials, cost fortunes and some even their lives; how Tesla Inc. founder Elon Musk became richer than Warren Buffett; and why on earth retail investors were rushing to buy shares of Hertz Global Holdings Inc., even though the car rental company had filed for bankruptcy. 

Well, gawk no more. The mania has landed in Hong Kong, too. 

Take a look at Evergrande Health Industry Group Ltd., a healthcare facilities provider under the umbrella of real estate giant China Evergrande Group. Its stock price has soared more than 200% this year, with most of the gain notched in July. That’s resulted in a market cap as high as $30 billion this week. The catalyst is not its Elderly Care Valley business, which operates specialized centers, but its electric vehicle operations, accounting for only 12% of sales last year. 

How to Turn Negative Equity Into a $30 Billion Market Cap

There’s little news on Evergrande Health — it isn’t even covered by the sell-side equity analysts Bloomberg polls — but some investors have latched onto this stock as a Tesla play. Its parent company has the grand ambition to be more Tesla than Tesla, vowing to become the world’s biggest maker of electric vehicles. Since late 2018, Evergrande has spent billions on an array of EV-related companies. Goodwill, accrued upon a series of acquisitions, came in at 6.2 billion yuan ($885 million), or 17% of the company’s non-current assets at the end of 2019.

Never mind that Evergrande has yet to release its first pure battery vehicle under the flagship Hengchi brand — that deadline was already pushed back once — or that its factories in Guangdong and Shanghai won’t start production until 2021. That Tesla stock could draw 40,000 Robinhood users in a four-hour window shows there’s enough appetite for anything remotely like the U.S. market darling. Investors may also feel reassured now that Evergrande Health owns National Electric Vehicle Sweden AB, an EV maker that acquired Saab Automobile in 2012. It also has a joint venture with Koenigsegg Automotive AB, a top-tier supercar manufacturer. 

If anyone bothered to look at the company’s financials, though, they’d quickly get cold feet. According to its latest annual report, “equity attributable to owners of the company” was negative 1.3 billion yuan. In other words, while stock investors think Evergrande Health is worth $30 billion, an accountant could reckon that this company has zero value to shareholders. 

Building electric vehicles from scratch is an expensive endeavor. Evergrande Health’s negative equity stems from the fact that it has accrued 94.7 billion yuan in debt. Its parent, for instance, has provided a three-year, 32.2 billion yuan loan due next July, with interest rates ranging from 7.6% to 8%. Last year, finance costs in the EV business alone came in at 2.2 billion yuan, or 2.6 times the profit generated from the healthcare segment. As a result, Evergrande Health has no price-to-earnings, or price-to-book, to speak of — both are negative. 

But then liquidity and policy-driven markets can create very strange phenomena. Speculative capital flows have have already arrived in Hong Kong — just look at the stronger local dollar, which by ordinary logic would have weakened as U.S. moved to strip the city of its special status. Trading will become even cheaper, too. Huatai International Ltd., the Hong Kong arm of China’s third largest broker, is no longer charging commissions.

Meanwhile, animal spirits returned to China’s $9.7 trillion stock market in July. At this market cap, Evergrande Health can just do a secondary listing on the mainland if it’s short on cash, without having to prove to regulators that it has an “edge” or “world-leading technology.” A sky-high valuation in China, in turn, would support its Hong Kong-listed shares, one could argue. 

Hong Kong’s stock market is an interesting hybrid, part-American because of the Hong Kong dollar peg, and part-Chinese because many mainland companies list there. Now that both U.S. and China markets have gone into a trading frenzy, it's only natural that Hong Kong will catch up. So don’t be surprised if more Tesla wannabes start cropping up. 

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.

©2020 Bloomberg L.P.

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