The dash for cash

An Rmb800 billion sales target

Alarge house in central Beijing’s Chaoyang district went up for sale in late May on Alibaba’s auction platform Paimai. The house, which measured 305 square metres (or around 3,300 square feet), had a bank valuation of Rmb14.2 million ($2.2 million).

Bidding for the foreclosed property started at Rmb12.8 million and climbed in increments of Rmb10,000. As things heated up one bidder intended to put in an offer at Rmb16.5 million but accidentally added an extra zero, which brought the price to Rmb165 million. But instead of deterring other buyers, this error saw others continue to jump in and the price quickly rose. The house was eventually sold for Rmb170 million.

The ‘fat finger’ bidder realised that he had made a mistake and he retreated midway through the bidding process. But the winner, once he found out about the blunder, refused to honour the purchase. That didn’t stop the auction platform from slapping a penalty of Rmb2 million on the buyer for failing to pay up.

The fiasco has raised questions over the reliability of online property auction platforms. However, it is the enormous debt load of some of the country’s biggest real estate developers that analysts say looks more concerning. Chinese property players have emerged as the biggest group of borrowers in Asia’s junk bond market in recent years, which has now stoked default concerns.

Last week, ratings agency Moody’s downgraded the outlook for Evergrande, the country’s largest property developer by sales, to negative from stable. The agency is worried about Evergrande’s ability to reduce its debt levels amid the current economic downturn.

Evergrande is the most indebted developer in an industry that is already heavily leveraged. The Hong Kong-listed firm has borrowings 300 times the size of its shareholder equity, though it has promised to cut interest-bearing debt by Rmb150 billion each year through 2022.

The Moody’s announcement gave short-sellers an opportunity to bet against Evergrande’s share price. That said, the firm is no stranger to battling those who bad-mouth its financial health. For instance, it took legal action against Andrew Left’s Citron Research over a damning report published in 2012 (see WiC158). The court tussle ended last year with Citron fined, as well as handed a five-year trading ban in Hong Kong.

This time round Evergrande has been quick to react as well. Shortly after Moody’s announced its downgrade, the developer rushed out an early release of its 2020 interim sales report. According to the business update, Evergrande has recouped Rmb287 billion in cash from property sales in the first six months of this year, which was 53% higher than the year-earlier figure. Much of that was payments on previous sales of off-plan projects. Despite the disruption caused by the Covid-19 outbreak, contracted sales still rose 12% to Rmb315 billion too.

Just last week Evergrande unveiled 14 new projects which immediately sold out. The buying will result in another Rmb18 billion in revenue, Chinese media reported.

“The developer has continuously offered discounts to lure buyers. Take June, for instance: those who bought a flat from one of its 600 projects around the country enjoyed a 15% discount. If they purchase the property through Evergrande’s own platform they saved another 9%. That’s how they continuously drive down their inventory,” noted JRJ.com, a financial news portal.

So far Evergrande has reached 40% of its annual sales target of Rmb800 billion and it expects to do better in coming years. Hong Kong’s Bastille Post, a news portal, noted that the Guangdong-based developer is planning to grow its annual sales target to Rmb900 billion for 2021, and Rmb1 trillion for the year after. Evergrande has been able to maintain a 10% profit margin over the years, Bastille Post noted.

So does it make sense to bet against the indebted developer? “The company’s panicked reaction to the possibility of a credit downgrade may tempt more investors to join the shorts. They should resist,” counselled the Financial Times. “Evergrande, has been actively shorted for the better part of the last decade. Over that time its shares have increased [in value] by around 800%,” the FT added.

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