O Evergrande Group da China, a developer today on the verge of bankruptcy, made many efforts over the years to branch her business beyond real estate, but most impressive is how she managed to manipulate the capital markets with the stories she created.
One such story is Evergrande as a maker of new energy cars. The market value of the China Evergrande New Energy Vehicle Group (Evergrande Auto), which has yet to sell a single car, reached Hong Kong dollars 674.1 billion (US$86.6 billion, about R$462 billion) , making it not only the most valuable listed company in China, but also twice as valuable as its parent, Evergrande — even though Evergrande has sold trillions of yuan worth of residential real estate in the past 20 years.
But times have changed. Evergrande Auto is currently valued at 30 billion Hong Kong dollars (HK$), about 4% of its peak. On Tuesday (21), the company awarded 323.72 million stock options worth HK$1.26 billion (BRL 870 million) to three directors and about 3,180 employees of the company, according to a document sent to Hong Kong Stock Exchange.
The people who profited most from the Evergrande stories are its founder, Hui Ka Yan, and your friends. For example, a person in Hui’s circle bought 80 million shares of the Evergrande Health Industry Group —Evergrande Auto’s predecessor before it was renamed to serve its new purpose — for HK$0.3 each, before selling them all for HK$50 a share, according to the Caixin news agency. The deal earned the investor more than HK$4 billion.
Encouraged by this soaring success, Hui’s friend also participated in Evergrande Auto’s private placement, but found his luck had changed, according to Caixin. He continued to buy shares as the price fell, but was eventually forced to sell them at a loss.
Evergrande Auto’s main objective was to raise capital for the Evergrande group. The parent company claimed it had invested 47.4 billion yuan (R$39.34 billion) in its auto business, but some analysts believe the bulk of that investment came from the market, not from Evergrande itself.
“Evergrande Auto had raised 30 billion yuan in two rounds. Which means the company used mostly investor money — rather than its own capital — to invest, and managed to earn a high market value (for the car company Consequently, with her (car company) shares at a high price, she could use them as collateral to raise even more money,” an analyst said.
As Evergrande Auto’s story unfolded, the plot focused on mergers and acquisitions, not car manufacturing. In September 2018, Evergrande bought a large stake in Xinjiang Guanghui Industry Investment Group for 14.5 billion yuan (R$12 billion), making it the company’s second-largest shareholder. This deal brought car sales into the news because Guanghui Industry Investment is a shareholder in China Grand Automotive Services Group, one of the country’s largest auto dealerships. This narrative never got anywhere, however. In 2019, cash-strapped Evergrande sold its stake in Guanghui Industry Investment to state-owned energy giant Shenergy Group for 14.85 billion yuan ($12.267).
In January 2019, Evergrande Auto’s predecessor, Evergrande Health, of the healthcare sector, acquired 51% of National Electric Vehicle Sweden (Nevs) for US$930 million (R$4.969 billion). Hui, whose Mandarin name is Xu Jiayin, closed the deal quickly, perhaps because he needed to bolster Evergrande’s automaker credentials after his decision to collaborate with controversial businessman Jia Yueting on the Faraday Future (FF) electric car project failed. wrong. Without FF, Xu needed something to flesh out Evergrande’s identity as a carmaker, and Nevs was just right. It worked out. After you bought a share of Nevs, the price of Evergrande Health skyrocketed.
The increase in these shares is due in part to the fact that they are concentrated in the hands of relatively few shareholders. On August 9, 2020, the company received a warning from the Hong Kong Securities and Futures Commission about high concentration in its ownership. The commission’s conclusion suggested that on August 5, 2020 a group of 18 shareholders owned 19.83% of the shares issued by the company. Together with the 74.99% of shares issued by the company, this participation represented 94.82% of the company’s total shares. Only 5.18% of the shares issued by Evergrande were held by other shareholders of the company.
The agreement to take a majority stake in Fangchebao Group provides further evidence of Evergrande’s financial techniques. It acquired a 51% stake in Fangchebao’s more than 40,000 physical stores through a share swap. Thus, Evergrande did not have to pay money for the deal, for which it lured Fangchebao by promising an opportunity to go public. As a result, Evergrande acquired valuable assets with an investment of approximately 1 billion yuan (R$826.1 million) to cover store refurbishment and system integration costs. At the end of 2020, Fangchebao’s total and net assets reached 4.7 billion and 3.1 billion yuan, respectively (R$3.9 billion and R$2.57 billion).
On March 29, 2021, Fangchebao brought in 17 strategic investors and raised a total of HK$16.35 billion (BRL 11.28 billion). These investors would have a 10% stake in the company upon completion of the deal, raising Fangchebao’s pre-financing valuation to HK$163.5 billion. This deal would have a portion of the funds raised through the sale of existing shares, with the remainder raised by issuing new shares. Fangchebao issued 651 million new shares to investors, while Evergrande intended to sell 651 million existing shares to investors.
In this way, Evergrande was able to increase Fangchebao’s market value to HK$163.5 billion (R$112.21 billion) in one year and pocket HK$8.175 billion (R$5.610 billion) with the sale of its shares in company.
A question now is how Evergrande managed to get investors into Fangchebao’s business?
An institutional investor who participated in the deal said the secret was Evergrande’s promise to buy back. “What we valued is its valuation adjustment mechanism,” said the investor. “If Fangchebao didn’t go public within a year, Evergrande would buy back our shares at a 15% premium to the prevailing market price. At least, through this mechanism, we could get our money back.”
The investor also indicated that another company under the Evergrande umbrella, the Evergrande Property Services Group, managed to go public very quickly, which gave investors confidence that they had a potential exit from the business that was not too far away.
Some other investors also believed Evergrande could push Fangchebao’s valuation, but wanted the company to remain private. “Fangchebao, which sold cars and houses, was just a story. But we believed Evergrande wouldn’t get in big trouble in a year (and could get the money back). That’s why we invested. relatively low quality company, much worse than Evergrande Property Services. In the case of Fangchebao, it was better not to go public. It would be more problematic after going public because its poor performance would be public knowledge,” an investor said.
Many institutions bought Fangchebao shares because they believed Evergrande was “too big to fail” —at least not for another year.
“Last year, when Evergrande turned a strategic investment into common stock, the price of its bonds plummeted,” said one institutional investor. “At that time, we speculated that it wouldn’t go bankrupt, so we bought more and ended up making a lot of money. In comparison, a while ago, the bond prices of China Fortune Land Development (another big real estate company) also dropped significantly, but we didn’t buy anything because we felt that Ping An (a large shareholder of China Fortune Land) would not come to the rescue.”
The Evergrande story is about growing with the trends, or is it really about raising money to support your real estate unit full of debt, o Evergrande Real Estate Group?
“Essentially, Evergrande has reduced the proportion of debt on its balance sheet in two areas: its auto subsidiary and Fangchebao. With the high valuation of these assets, it has been able to raise a large amount,” explained one industry veteran. “Evergrande’s ultimate intention was to get more land under the guise of making cars, and then use the land to make money.”
Paraphrasing Warren Buffet: only when low tide do you find out who was swimming naked. With declining house prices and the implementation of the three red lines policy — which stipulates a 70% ceiling on a contractor’s debt-to-asset ratio, a 100% ceiling on its net debt-to-equity ratio, and cash to cover short-term loans—amazing “financial techniques” are no longer the panacea for Evergrande’s rising operating costs. China’s former real estate giant is drowned in debt.
Xu’s personal assets have also been quietly shifting. Recently, the mansion on a hill where he lives in Hong Kong was transferred to a new owner.
Evergrande seemed to be generous to its investors. From 2011 to 2020, it paid dividends every year. The total amount disbursed exceeds 114.2 billion yuan (R$94.79 billion), with the dividend payout ratio maintained at 50%, much higher than that of other Chinese real estate giants.
But to whom were these generous dividends paid? As of June 2021, Hui, his wife, Ding Yumei and relatives owned 76.7 percent of Evergrande’s 13.248 billion publicly traded shares. In other words, 53 billion yuan of the 69 billion that Evergrande has paid out in dividends since going public has ended up in the pockets of Hui and his family.
Translated by Luiz Roberto M. Gonçalves
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