Hengda Group (Chinese: 中国恒大集团), also known as China Evergrande Group, has undoubtedly dominated the global financial headlines over the past few months. While Hengda has frequently been portrayed as a colossal real estate developer and the company's core business is real estate development, we want to deliver a more complete and comprehensive view of the conglomerate and its individual constituents. Comprehensiveness is, in our opinion, vital to fully understanding the entirety of what is at stake when analysing the potential collapse and future of Hengda.
Hengda Series Roadmap
Our Hengda series has six parts:
In Part 1, we provide an overview of the different constituents that comprise the Hengda conglomerate.
In Parts 2 to 4, we delve into each of Hengda's publicly listed supplementary business units, with Evergrande Property Services in Part 2, Evergrande Auto and Healthcare Segment in Part 3, and Tencent joint venture HengTen Networks in Part 4.
In Part 5, we analyse the financial standing of the conglomerate taken as a whole.
In Part 6, we discuss different instances of corporate governance failures that have plagued the Group.
In Part 7, we conclude with some final thoughts and discussions on frequently encountered questions.
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Hengda Group was founded in 1996 as a real estate development company based in Guangzhou, Guangdong province, and went public on the Hong Kong Stock Exchange (HKEX: 3333) in November 2009. Since its inception, Hengda has expanded nationwide to become one of the largest players in China's real estate industry with a presence in 234 cities across the country through 798 different projects and 231 million square metres of land reserves by the end of 2020.
As of the end of 2019, Hengda claims to be the second largest real estate company in China in terms of the total number of cities covered, with the third highest total revenue, gross profit, and net profit among Chinese real estate companies, as well as the third highest contracted gross floor area (GFA) and the fourth highest GFA under management.
Hengda's real estate portfolio is heavily residential-oriented, although the company also has diverse commercial development projects such as amusement parks, hotels, office buildings, and retail shops, in addition to car park spaces in residential complexes.
Hengda's 798 projects are spread out across most provinces in China, with Guangdong having the highest number of development projects.
A Diversified Conglomerate More Than Just Real Estate
Although Hengda is commonly viewed as a real estate company, and indeed real estate does lie at the core of the company's business, Hengda prefers to describe itself as a diversified conglomerate with additional businesses to supplement its core real estate development focus.
Hengda's supplementary business mix is constantly evolving and there is very little continuity in terms of the Group's defined business segments from year to year.
As of 2020, Hengda has defined seven supplementary businesses, as follows:
Evergrande Property Services
Of these seven business units, the first four (namely Evergrande Property Services, Evergrande Auto, Healthcare Segment, and Hengten Networks) are publicly listed companies on the Hong Kong Stock Exchange. In contrast, Fangchebao, Evergrande Fairyland, and Evergrande Spring are private, despite Hengda's many attempts to push Fangchebao and Evergrande Spring for an IPO.
Overview of Key Supplementary Businesses
In this section, we provide an overview of each of Hengda's seven supplementary businesses. We go through the publicly listed busineses in Parts 2 to 4 (forthcoming).
#1: Evergrande Property Services (恒大物业集团)
Evergrande Property Services is a property management company that provides property management services primarily to real estate projects developed by Hengda. The company operates nationwide across 31 out of China's 34 provincial-level administrative regions with a total contracted area of 810 million square metres, including 450 million square metres of area under management. Up until the first half of 2021, approximately 99% of properties under management were residential properties developed by Hengda. Evergrande Property Services has been trying to diversify by garnering more contracts with third-party developers and engaging in non-residential property contracts, although significant concentration risk still remains.
On October 4th 2021, Evergrande Property Services and Hopson Development Holdings (HKEX: 0754), another Guangdong-based real estate developer, both requested a trading halt of their shares, citing a potential acquisition. However, on October 20th, the two companies announced that the deal did not go through, with Hengda mentioning that Hopson did not fulfill the requisite pre-conditions for the acquisition, and Hopson stating that the company did not go through with the acquisition that was originally scheduled to take place. Whilst not officially confirmed, insider rumours have surfaced suggesting that Hopson Development Holdings and Hengda founder Hui Ka Yan could not reach an agreement as to where and how the acquisition money should be allocated.
We explore Evergrande Property Services in further detail in Part 2 (forthcoming).
#2 and #3: Evergrande Auto (恒大汽车) and Healthcare Segment
Hengda acquired a third-party media company listed on the Hong Kong Stock Exchange named New Media Group Holdings (Chinese: 新传媒体集团) (HKEX:0708) in February 2015, presumably as part of a shell company acquisition. Hengda renamed the company Evergrande Health Industry Group (Chinese: 恒大健康产业集团) and commenced healthcare business operations. In November 2017, Hengda disposed of the media business segment, citing the decline of the print industry, before launching its new energy vehicle business alongside the healthcare segment in June 2018. In 2020, Evergrande Health Industry Group changed its name to China Evergrande New Energy Vehicle Group, known as Evergrande Auto (Chinese: 恒大汽车) for short.
We discuss Evergrande Auto further in Part 3 (forthcoming).
#4: HengTen Networks (恒腾网络集团)
In July 2015, Hengda and Tencent jointly acquired Mascotte Holdings (HKEX: 0136), a loss-making company listed on the Hong Kong Stock Exchange that was involved in the investment and trading of securities, provision of loan financing services, property investment, and the manufacturing and sales of accessories for photographic products (we think this was probably another shell company acquisition). Mascotte Holdings was renamed HengTen Networks, with Hengda directly and indirectly owning 61.32% of the acquired company's shares and Tencent directly and indirectly owning 22.30%.
HengTen did not continue the loan financing business, and also eventually disposed of the carried over financial investment and property investment business segments in 2018 and 2019 respectively. The photographic product accessories manufacturing and selling business was kept on a small scale, as HengTen's main business became "internet community services" (e.g. using the in-house developed HengTen Mimi app to pay property management fees and utility bills online, to request home repair, maintenance, and cleaning services, and to remotely security monitor properties) and "internet home" (i.e. selling home decoration online).
During the first half of 2021, HengTen completed its acquisition of Virtual Cinema Entertainment, a private company that includes a film production subsidiary, Ruyi Films (Chinese: 上海儒意影视制作有限公司), and an online streaming company similar to Netflix, Pumpkin Films (Chinese: 南瓜电影). Virtual Cinema Entertainment has produced several movie successes the past year, including the top-grossing film on 2021 New Year's day and China's second highest grossing movie of all time. HengTen's total revenues have been shrinking over the past few years, and the company hopes that content production and online streaming will be a new growth point.