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 summarize the series and 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, including the Group's publicly listed subsidiaries which are explored in further detail in Parts 2 to 4.
#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.
#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.
#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 application 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.
We discuss HengTen Networks in more detail in Part 4.
#5: Fangchebao (FCB) Group (房车宝)
In its 2016 annual report, Hengda mentioned its plan to launch an in-house developed mobile application named Hengfangtong (恒房通) that can be used to support the online selling of properties in order to reduce the company's selling expenses. Hengfangtong was officially launched in 2017, although the application did not receive much attention until during the COVID-19 pandemic in 2020 when Hengda expanded the app's functionalities to facilitate the entire buying and selling process.
On December 30th, 2020, Hengda officially launched Fangchebao Group. The name Fangchebao literally translates to "house-car-treasures", as Hengda aims to develop Fangchebao into a comprehensive transaction platform for properties and automobiles. Currently, the properties listed on Fangchebao are predominantly first-hand and are mostly developed by Hengda. The automobile page on the platform advertises Hengda's electric vehicles. As of the end of 2020, Fangchebao covers 229 cities with 21.29 million brokerage users, 387,000 professional brokers, and 43,000 different individual brokerage stores.
Hengda claims that, going forward, Fangchebao will consist of three distinct platforms: FCB National Brokerage Platform, FCB Platform and FCB SaaS (Software as a Service) Management Platform. No further details on any of the platforms have been provided, and we think the three platforms were mentioned for the sake of adding fluff rather than serving as clear commitment indicators from the company.
In March 2021, Hengda sold approximately 10% of Fangchebao Group to 17 investors for over HKD16 billion, presumably to boost its liquidity standing. Investors were attracted by the valuation adjustment mechanism (VAM) offered by Hengda, where Hengda promised to buy back the shares sold to the investors at a 15% premium if Fangchebao could not go public within one year, or if Fangchebao went public but at a lower than agreed upon IPO price.
#6: Evergrande Fairyland (恒大童世界)
Hengda first mentioned of Evergrande Tourism Group as a business segment in its 2016 annual report, although the company had previously discussed the concept of "cultural tourism" in previous years, a term which more or less refers to theme parks with Chinese cultural aspects. Hengda launched Ocean Flower Island, a water theme park located in Hainan island, in December 2015, with first phase operations commencing in 2021. The concept of Evergrande Fairytale Land ("Fairyland"), which refers to an indoor fairytale-themed theme park for young children, was first mentioned in 2016, as the development of 15 such Fairyland projects was further publicised in 2017.
In 2018, Hengda highlighted that Evergrande Tourism Group will specifically narrow down its focus to developing two flagship theme park products: Evergrande Fairyland and Evergrande Water World, of which Ocean Flower Island is included in the latter. In 2019, Hengda mentioned the company expects to develop 20 to 30 Evergrande Water World parks in the coming three years. In 2020, the Evergrande Tourism Group segment became known as just Evergrande Fairyland, and there was no mention of the Evergrande Water World projects except for the first phase operations of Ocean Flower Island.
#7: Evergrande Spring (恒大冰泉)
Evergrande Spring is a mineral water brand founded by Hengda in 2013. Initially, Hengda hired famous actor Jackie Chan as well as several sports teams to advertise the mineral drinking water product. The initial retail price was set at RMB5 per bottle to target the upscale market, although the company had to keep reducing the product's price each year, eventually to RMB1 per bottle. Hengda also tried to sell rice, cooking oil, and other grocery products, although these products never gained popularity.
Overview of Associate Companies
Next, we turn to the associate companies that Hengda has investments in, meaning those companies that Hengda has significant influence but not full control over (i.e. between 20% to 50% control of the voting power).
Henghda has two associate companies: Shengjing Bank and Evergrande Life Insurance.
Shengjing Bank (盛京银行）
Shengjing Bank is the largest bank in the northeast region of China with total assets of RMB1.02 trillion as of June 2021. Hengda has been Shengjing Bank's largest shareholder since 2019, with a 36.4% equity interest in the bank.
Evergrande Life Insurance (恒大人寿保险）
In November 2015, Hengda acquired a 50% equity interest in Great Eastern Life Assurance (China) (Chinese: 中新大东方人寿保险), the Chinese joint venture arm of Singaporean finance and insurance company Great Eastern. Hengda subsequently renamed Great Eastern Life Assurance (China) to Evergrande Life Insurance, and provided capital injections of RMB3 billion and RMB9 billion to the insurance company in 2015 and 2016 respectively. Reasons for the capital injections have not been disclosed by Hengda.
In 2020, Evergrande Life Insurance earned RMB60 billion in insurance fees.
Lastly, we mention a few of the myriad of other businesses that Hengda has. Most of these are inconsequential and/or have been discontinued, with the exception of Evergrande Wealth Management, a business unit that topped the headlines in China due to high profile scandals.
Examples of Hengda's other businesses include Evergrande Khingan (Chinese: 恒大兴安), a cooking oil brand, Evergrande Supermarket (Chinese: 恒大超市), Evergrande Music (Chinese: 恒大音乐), and Evergrande Cinemas (Chinese: 恒大影城). Many of the initiatives are housed under Evergrande Culture Group (Chinese: 恒大文化产业集团). Evergrande Culture Group listed on the New Third Board (Chinese: 新三板) in 2015, an OTC market where small- and medium-sized non-public companies can list their shares.
Hengda also has a football team, Guangzhou Football Club (Chinese: 广州足球俱乐部), formerly known as Guangzhou Evergrande Football Club (Chinese: 广州恒大足球俱乐部). Hengda was known for paying large sums of money to hire international players who propelled the team to win the Chinese Football Association Super League on multiple occasions. However, the team recently terminated contracts with many top players as Hengda could no longer afford to pay their salaries.
Evergrande Wealth Management (恒大财富)
Originally, Hengda founded a peer-to-peer (P2P) lending platform known as Evergrande Financial (Chinese: 恒大金融) in 2015 when P2P lending was popular in China. Following the Chinese government's crackdown on the P2P market, Hengda re-positioned its financial business and transformed Hengda Financial to Evergrande Wealth Management (Chinese: 恒大财富) in 2018. Evergrande Wealth Management has been associated with numerous corporate governance horror stories which we discuss subsequently in Part 6.
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