Evergrande Gives Early Results in Face of Possible Downgrade

(Bloomberg) -- China Evergrande Group took the rare step of releasing preliminary results as it faces a potential credit downgrade amid growing concerns about the property developer’s mounting debt load.

Evergrande said year-to-date cash collection from property sales surged 53% to 287 billion yuan ($40.6 billion) from a year earlier. Contract sales rose 12% for the year to June 22, and will increase further with launches of another 20 projects by month end, the firm said in a filing Wednesday.

“Faced with the impact of the coronavirus pandemic and the general decline in sales in the industry, the group’s contract sales and amount of cash collection still recorded significant growth against market trend,” the Guangzhou-based company said in the statement. “The group is confident of achieving all the operating goals for the year.”

The preliminary sales report came 14 hours after Moody’s Investors Service changed its credit outlook to negative from stable, citing Evergrande’s “weak” liquidity, coupled with lower profit margins and China’s worsening economy, according to a report by Hong Kong-based analysts Cedric Lai and Franco Leung.

Evergrande’s cash holdings, combined with its cash flow from operations, won’t be sufficient to cover debt obligations through the next 12 to 18 months, forcing the company to sell more debt, the Moody’s analysts said. The ratings firm also expressed concerns about Evergrande’s ability to reduce short-term debt and leverage in the next year. The long-term rating remains B1, four notches below investment grade.

Short-term borrowings of Evergrande, China’s third-largest developer by sales, were unchanged at 372 billion yuan ($53 billion) at the end of 2019, the annual report showed. Its cash buffer weakened from six months earlier to 229 billion yuan, from 288 billion yuan.

Still, at least one analyst expects the wave of project launches will outweigh liquidity weakness.

“We are not concerned about its liquidity, given strong cash collection this year and the easing credit market,” said Nomura Holdings Inc. property analyst Leif Chang.

Evergrande’s sales may jump 54% in June from a year earlier, dwarfing single-digit growth by peers, Chang said. Sales in the first half are likely to reach 350 billion yuan, meeting almost half of Evergrande’s internal bullish-case target of 800 billion yuan for 2020, he estimates.

However, boosting sales to meet debt coverage may hasten the need to sacrifice margins, leading to more price cuts, Bloomberg Intelligence’s property analyst Kristy Hung wrote in a note.

Evergrande dipped 0.8% to HK$19.72 at 11:59 a.m. in Hong Kong. The stock has fallen 8.7% this year, outperforming the main Hong Kong index, which has dropped almost 12%.

©2020 Bloomberg L.P.

With assistance from Bloomberg