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Hengda (Part 7): Concluding Evergrande

In Part 1 of our Hengda (Evergrande) series, we introduced the Hengda (China Evergrande) conglomerate, while in Parts 2 to 4 we explored each of Hengda's publicly listed subsidiaries (Evergrande Property Services in Part 2, Evergrande Auto and Healthcare Segment in Part 3, and the now divested HengTen Networks in Part 4). Subsequently in Part 5, we conducted a financial analysis of Hengda Group, followed by a more qualitative assessment of corporate governance failures that led to the Group's decline in Part 6.

In this article, we provide a synopsis of the previous articles in this series for readers who prefer brevity, in addition to discussing several key questions:

  • Is Hengda Group Another Lehman Brothers?

  • Will The Chinese Regulators Let Hengda Fall?

  • What Is The Fate of Hengda's Other (i.e. Non-Core) Businesses?

Hengda (Evergrande) Conglomerate Series


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Concluding the Collapse

Hengda (China Evergrande) Group is a Chinese property developer founded in 1996 that has since expanded to become one of China's largest real estate players with a presence in 234 cities through 798 projects and 231 million square metres of land reserves at the end of 2020. The Group markets itself as a diversified conglomerate with additional businesses to supplement its core real estate development focus, including property management services (see Part 2), healthcare and new energy vehicle businesses (see Part 3), an internet-related joint venture with Tencent Holdings (see Part 4), an in-house developed mobile application to support property selling, a theme park business, a mineral water brand, a cooking oil brand, a supermarket chain, a cinema chain, and a football club. Hengda also has investments in two associate companies: (1) Shengjing Bank (Chinese: 盛京银行), the largest bank in the northeast region of China, and (2) Evergrande Life Insurance (Chinese: 恒大人寿保险), the Chinese joint venture arm of Singaporean finance and insurance company Great Eastern. Additionally, Hengda runs a wealth management platform, Evergrande Wealth Management (Chinese: 恒大财富), which has a stated purpose of selling third-party financial products similarly to a brokerage firm.

Note: for a more thorough overview of Hengda's various businesses, see Part 1.

Turning to the Group's financials, Hengda's revenues have been growing year on year while gross profit and operating income declined due to lower (clearance) property selling prices and price concession campaigns. An examination of the Group's revenue structure reveals that property development accounted for almost the entirety of Hengda's revenues each year, in spite of the Group's attempt to market itself as a diversified conglomerate. Moreover, like other Chinese real estate developers, Hengda was also highly leveraged with a peak leverage ratio of 41.6% and total borrowings outstanding of RMB800 billion in 2019, nearly half of which constituted of current borrowings due within one year. Although the Group lowered its leverage level down to 24% by the end of 1H2021, this was accomplished at the compromise of delayed payments to third-party suppliers and contractors, resulting in a colossal accounts payable balance of nearly RMB1 trillion. We gauged Hengda's liquidity standing to find that the Group's liquid current assets only covered 22% of its current borrowings and accounts payable in June 2021.

Note: for a financial analysis of Hengda, see Part 5.

A more qualitative examination of Hengda reveals that the Group's aggressive expansion was significantly fueled by attempts at regulatory arbitrage and lapses in corporate governance which allowed for the raising of alternative funding. Specifically, Hengda employed various alternative funding sources including the more common trust companies but also wealth management products, the founding of seemingly unrelated projects and companies, and even the Group's own employees, suppliers, and contractors, to dodge regulatory restrictions and channel more funds into its real estate development projects. Notable examples include Hengda's healthcare management and cultural tourism initiatives which allowed the Group to bid land and obtain public grants from local governments under a more favourable guise, the seemingly glamorous but essentially defunct Evergrande Auto which has yet to deliver a single car to consumers, and financial platform Evergrande Wealth Management which is only licensed to sell third-party products but circumvents these restrictions in practice by encouraging investors to place their money in third-party trust companies that invest in Hengda's real estate projects.

Furthermore, Hengda required its employees to invest a certain amount of money into Evergrande Wealth Management's products each year, while also generating cash advances from employees through an incentive program where Hengda employees were able to purchase the Group's properties at a discount during special events and resell the properties to buyers in the real estate market at higher prices thereafter. As part of this program, the sales proceeds gained when employees resell their discounted properties on the market were paid directly to Hengda, with a contractual agreement stating that Hengda will remit the proceeds to each relevant employee one month after payment is received from the property buyer. Since 2020, Hengda has not remitted any sales proceeds to its employees, while Evergrande Wealth Management had RMB40 billion of overdue principal repayments outstanding in September 2021. Additionally, Hengda frequently generated funding by leveraging the Group's superior market power to pressure third-party suppliers and contractors into spending a portion of their compensation on purchasing Evergrande Wealth Management products and/or Hengda debt issues. As the Group's liquidity position deteriorated, Hengda also substituted its commercial papers as compensation to counterparties in place of cash.

Note: for a comprehensive discussion of Hengda's various corporate governance related failures, see Part 6.

In the subsequent sections below, we discuss various questions and present our thoughts on the future of Hengda.

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