Evergrande is 2.4 trillion yuan in debt, a game of "beating drums and passing flowers", "self-inflicted sins are difficult to live"
664.3 billion in revenue that "disappeared"
From "mediocre" to trillions in debt, from being at the top of the list to being in deep crisis, Evergrande Group has gone all the way to less than 5 years, and it has hurriedly departed from the law of industry development and challenged market cognition with various extreme operations.
According to the financial report, China Evergrande's net loss in 2021 totaled 686.22 billion yuan (RMB, the same below), and the total net loss in 2022 was 125.81 billion yuan. The total loss for the two years was 821.03 billion yuan. According to the financial report, as of the end of 2021, China Evergrande's total assets were about 2,107.1 billion yuan, and its total liabilities were about 2,580.2 billion yuan, so its net assets were about negative 473.1 billion yuan; As of the end of 2022, China Evergrande's total assets were about 1,838.3 billion yuan, and its total liabilities were about 2,437.4 billion yuan, so its net assets were about negative 599.1 billion yuan.
People know he's a big thunder but don't know how big and dangerous he is. Some melon-eating people compare more than 2 trillion yuan in debt with the current richest man's worth, which is equivalent to 5.7 richest people, the annual GDP of 5 Taiyuan City, and the annual income of 10 million yuan to save 240,000 years to have so much. Two more data show the large debt, Guangzhou's annual GDP last year was 2.88 trillion yuan, while Vietnam's annual GDP in 2022 was 2.74 trillion yuan.
The whole network is amazed at how the former richest man can spend so much money and do so? But in fact, a large part of the 2.4 trillion yuan is composed of creditors, and the reason why it is so high is because Evergrande frantically leveraged a few years ago, believing that "scale is king". However, in the downward period of "cold and pressing", everything that should be revealed and should not be revealed was thunderous, and the strongest military division "known as an annual salary of 10 million" had already retreated bravely, leaving only Professor Xu in the roof of Evergrande messy.
Compared with the scale of liabilities, the industry is more concerned about how Evergrande dares to write down so much up to 664.3 billion yuan (excluding tax), the final deadline for accounting treatment is January 1, 2021, but the covering period may be as high as several years, and the above report reflects a huge impairment of operating income in 2021 and before. In other words, China Evergrande reduced its revenue by 664.344 billion yuan in previous years or years, and we must not only ask why it made such a huge income reduction? How did this 664.344 billion suddenly disappear?
A number of industry insiders said that such a large-scale early recognition of revenue, from the motivation point of view, a large amount of revenue that does not conform to accounting standards into the audited income of the year, the main purpose is to increase the assets on the books, leverage higher leverage, promote faster turnover, dividends are full, so as to achieve the purpose of "big big, buy buy buy". This is a typical "food eater", which is equivalent to trying to call the debt owed to others as one's own assets, and fooling until the new financing is followed and then the lie is told.
A number of senior finance and tax professionals believe that such a huge adjustment is shocking, and the expression of the reason for "accounting treatment change" is far-fetched, obviously avoiding the expression of major accounting errors, unprecedented in the professional field, directly pointing to the huge risks hidden behind Evergrande's liabilities and possible systematic fraud.
But what is even more ridiculous is that Evergrande has always been "generous" in dividends before the accident. The 2020 audit report of Evergrande Real Estate Group stated that it planned to pay dividends in two installments, 44.6 billion yuan and 27.5 billion yuan, respectively, but the actual payment amount could not be verified. According to public data, from 2016 to 2020, China Evergrande Group (03333. HK) paid dividends every year, accumulating 93.933 billion yuan, of which in 2020, that is, the year before the risk, its dividends were as high as 57.779 billion yuan, accounting for 61.5%. The basis of the huge dividend is the normal operating income of the enterprise, legal and compliant profits, and after nearly half of the income in the three years from 2018 to 2020 was recovered "technically" on the grounds of "accounting treatment change", the net loss of 686.2 billion yuan in 2021 should include the profit generated by the previous reduction of income, which means that the original dividend has lost its performance basis. Therefore, Evergrande's audit company PricewaterhouseCoopers is currently caught in the whirlpool of public opinion.
Less than 5 months before the lightning explosion, on July 15, 2021, the board of directors of China Evergrande also wanted to engage in a special dividend, but under the pressure of strong public opinion, it had to cancel this absurd farce a week later.
Why is Evergrande like this
Some people eat Evergrande's affairs as melons, but as a long-term concern about the real estate industry, the author can't laugh. The fall of Evergrande is a scar left by the "high turnover era", which has not faded with time, and those Evergrande buildings that cannot be handed over on time, long-term suppliers who are in arrears, and employees who are laid off and arrears of wages are still fermenting and waiting for problems.
Evergrande's current liabilities have reached 2.4 trillion yuan, but the scale of accounts payable has reached 1 trillion yuan, and it has continued to increase since the end of 2020. Behind this figure of 1 trillion is the fall of countless enterprises, and the formation of a larger triangular debt and debt dispute. This has undoubtedly caused many obstacles to development for the industrial structure that has long relied on real estate as the pillar of the internal circulation of the economy. In the subsequent debt processing process of these real estate enterprises, the order of payment of these accounts payable is generally low, and it is basically difficult to be properly handled and resolved; For example, most of Evergrande's downstream suppliers can undoubtedly only account for bad debts and have no hope of recovering funds.
This is not the fall of Evergrande, nor is it just as simple as 2.4 trillion yuan in debt, this is a big recession in the real estate industry. And the source of all this began with Evergrande's determination to "high turnover" in 2016, and the gears of fate have since embarked on the road of no return.
From 2011 to 2015, Evergrande Group's asset-liability ratio has remained at about 75%, which was relatively less prominent, and it was still within the safe range at that time. However, since 2016, when it began to bet on the "high debt, high leverage, high turnover" business model, the group began to expand the scale of assets and liabilities beyond the norm and take it to the "extreme". At the end of 2016, the group's total debt reached 1.16 trillion yuan, an increase of 543.4 billion yuan over the end of 2015, an increase of 88.4%.
Debt is a powerful lever to leverage the rapid expansion of the scale of enterprises, and if used well, it can achieve a win-win situation of economies of scale, but if it is used too much, it will become a catalyst for the rapid accumulation of corporate risks.
When the 21st Century Business Herald collated the relevant public data and reports of Evergrande Group over the years, it was found that in order to achieve the annual debt increase in 2016, Evergrande Group mainly increased the scale of new financing channels and increased the scale of original financing channels at that time.
In terms of new financing channels, according to the data of the 2016 annual report, it has added three new financing channels: first, other borrowings in financial liabilities increased by 93.2 billion yuan, mainly formed by financial institutions raising trust funds for Evergrande Group and injecting capital through fund arrangements with financial institutions; Second, among the other payables, 44.2 billion yuan was added from the investor advances of subsidiaries (similar to the actual debts of clear stocks), mainly 31.2 billion yuan formed by receiving advances from various investors such as partners through real estate project cooperation, and 13 billion yuan of equity investment funds with repurchase obligations (related to the restructuring of deep housing); Third, Evergrande Financial, the predecessor of Evergrande Wealth, was launched in March 2016, adding about 28 billion yuan in payments from Internet product holders (i.e. wealth management product investors).
In terms of increasing the scale of financing through original channels, according to the data of Evergrande Group's 2016 annual report, Evergrande Group has two main actions in promoting the increase of financing through original financing channels. First, the balance of bank borrowings in financial liabilities increased by nearly 128.4 billion yuan compared with the end of 2015, an increase of more than 101%. This increase is mainly due to the fact that Evergrande Group obtained a large number of new credit lines by signing strategic cooperation agreements with many banks in 2016; Second, domestic corporate bonds added RMB14.2 billion, and Evergrande Group issued RMB10 billion and RMB4.2 billion in domestic private placement bonds in mid-January and late July, respectively.
If Evergrande had just gone on a debt spree, it might not have been so difficult today, and it made the mistake of blindly starting to diversify in poor fundamentals. According to the 2016 annual report, Evergrande Group announced that it has completed the layout of four major industries: real estate, finance, cultural tourism and health. The cultural tourism sector is referred to as "Hengtong", and its main assets are real estate projects and self-owned properties. Evergrande Tong World Group Co., Ltd. (hereinafter referred to as "Evergrande Tong World") was established in May 2015. Evergrande Tourism Operation Management Group Co., Ltd. (hereinafter referred to as "Evergrande Tourism") was established in March 2018.
According to people close to the matter of Evergrande Group, due to the rapid diversification of business, the internal operation, management and risk control level of the group have not kept up, resulting in virtual and uncontrolled corporate management, and there are many overt or covert illegal operations between various sectors and major regional companies, which not only formed and accelerated the outbreak of debt crisis, but also caused huge obstacles to its subsequent risk assessment and disposal.
Evergrande Flower Island
Some people say that Evergrande's problem is a universal problem that belongs to the tears of the times, and the people who say this do not understand the real estate industry at all. High turnover is indeed a common phenomenon in the past, but not all of them have made huge losses and huge risks, and Country Garden and Vanke, who are both trillion leaders, have handed over different answers.
Speaking of high turnover, Country Garden is the first player to get involved in the most proficient in this way, but in 2018, the overall collapse of the sales department under construction in Lu'an in 2018 made the board of directors of Country Garden rational, and the slogan of "full coverage and high turnover" was gone, replaced by debt reduction and scale reduction, believing that only by walking steadily can we go far.
In the past four years, Country Garden's "three red lines" have been improving year by year, and the last red line, that is, the "asset-liability ratio after excluding advance receipts", has always remained above 70% from 2019 to 2021, and finally reached a "qualitative" change in 2022. At the end of 2022, the company's asset-liability ratio excluding advance receipts was 69.4%, the net debt ratio was 40.0%, and the cash short-debt ratio was 1.60, all indicators met the "three red lines" medium and green file enterprise standards, and achieved the adjustment from yellow file to green file in 2022.
Country Garden achieved a total revenue of 430.371 billion yuan in 2022, a year-on-year decrease of 17.72%; The gross profit margin fell below double digits, only 7.64%, which was a cliff-like cut from 17.74% in 2021; Net profit -2.962 billion yuan, down 107.2% year-on-year. Of course, this level is not very good, but it is not much better than Evergrande being so fast and unable to breathe.
Vanke has always been an excellent student in the real estate circle, and he dares to say what others dare not say. As early as 2018, Yu Liang shouted "live" at an internal conference, and at that time, he was once ridiculed by the industry as a show. Now it seems that when the crisis hits, Vanke has done military exercises two years in advance.
At Vanke's 2022 annual general meeting, Yu Liang was re-elected as chairman of the board of directors without suspense. When talking about his feelings about the past three years, Yu Liang said that these are three years of "mixed feelings", and no one person or company is easy. In the past three years, the real estate industry has continued to decline, and Vanke has not been spared. But it was also "three years of working to solve the problems of old models, exploring new models, and finding new solutions." "Judging from the results, Vanke has not only maintained the bottom line of operational safety in the past three years, but also achieved solid performance. In 2022, Vanke's operating income will be 503.84 billion yuan, a year-on-year increase of 11.3%, the net profit attributable to shareholders of listed companies will be 22.62 billion yuan, a year-on-year increase of 0.4%, and the basic profit per share will be 1.95 yuan, a year-on-year increase of 0.6%.
Therefore, the author believes that "self-inflicted sins are difficult to live", not that housing enterprises have no way out, but that Evergrande has chosen the old road that is most difficult to turn back to. None of us can go back to the past to change all this, and all that remains is to face reality and solve seemingly impossible problems.
What else can Evergrande do
Whether Evergrande has made efforts to change the status quo, of course, there are.
Judging from the overall trend of Evergrande, it is indeed accelerating the reduction of the balance sheet, and the situation is also trying to break back little by little. By the end of 2022, total assets decreased by 268.8 billion yuan year-on-year. Among them, properties under development and properties completed for sale fell by MOP127.3 billion and MOP87.4 billion respectively, mainly due to the sale of high-quality real estate projects in some core cities. As of the end of 2022, Evergrande had a land reserve of 210 million square meters, a year-on-year decrease of 50 million square meters, a decrease of 19.2%. However, the change in total liabilities is still relatively small, except for the contract liabilities affected by factors such as guaranteed handover and project sale, borrowings and payables continue to increase. Among them, trade accounts payable and other payables and engineering materials payable increased significantly by RMB108.9 billion and RMB11.2 billion respectively in 2022. This means that through the name of guaranteeing the handover of buildings, Evergrande has realized the binding of upstream and downstream enterprises together to share the financial pressure.
In 2021, Evergrande's contracted sales were 443.02 billion yuan, with a contracted sales construction area of about 54.265 million square meters. By 2022, China Evergrande will achieve contracted sales of about 31.7 billion yuan (the amount after deduction is about 19.6 billion yuan), with a contracted sales floor area of about 3.904 million square meters, a year-on-year decrease of 92.8%. In the first five months of 2023, Evergrande's contracted sales were only 33.767 billion yuan, which exceeded the entire year of last year, but this scale is still a drop in the bucket.
At the same time, Evergrande also made it clear that the core task in the next three years will continue to be to ensure the delivery of buildings, to revitalize assets and withdraw cash flow to reduce the balance sheet, but in order to complete this task, it is expected that 250 billion ~ 300 billion yuan of financing will be required to ensure the resumption of work and production. Therefore, while speeding up asset restructuring, speeding up the handover of buildings and accelerating sales may be a more feasible way to help yourself. Although this is bound to be difficult and costly. But now in this situation, how many people dare to buy Evergrande's house, and how many people believe in Evergrande's house?
But Evergrande's center of gravity may not be here, as for Evergrande's "rotten" total debt of 2.4 trillion yuan to the outside world and the shocking hole, Xu Jiayin does not seem to be very worried. In the view of one analyst, "Evergrande issued four announcements in a row late at night, which may have been specially sent to creditors." A bit of a rogue sense of "just these few dishes left" and "don't have it out".
Boss Xu actually has confidence, that is, Evergrande Automobile. In the "self-help plan" released by Evergrande in the early days, creditors were given two choices: first, Evergrande would issue new bonds; Second, the new bonds issued by Evergrande are combined with the conversion of shares. In the second choice, Evergrande specifically mentioned that the remaining debt is linked to the equity of Evergrande Automobile, and the bonds can be converted into corresponding stocks. In other words, Xu Jiayin wants to use new debts to pay off old debts and debt-to-equity to resolve all crises.
When the "self-rescue plan" first came out, creditors did not buy it, because Evergrande Auto was comparable to "Evergrande Second" and was a fast and insolvent "junk asset". The data shows that Evergrande Auto has total assets of 59.521 billion yuan and total liabilities of 58.83 billion yuan. Xu Jiayin wants to dump a "garbage asset" to creditors, who are not all fools, and some creditors refuse to buy it. This was evidenced by Evergrande's announcement before the May Day holiday, "due to the fact that some creditors did not join the applicable restructuring support agreement, it was decided to extend the deadline of the relevant agreement." From the perspective of business games, this is a "temptation".
Isn't it just debt? What's the big deal, Boss Xu made a move to "move around" and packaged the company's 47 non-new energy vehicle projects into a package and planned to sell them to Evergrande, which thundered, at a price of 2 yuan. In this way, Evergrande Auto only engaged in the automobile business, but Evergrande undertook 24.7 billion yuan of debt.
Aside from the market, products and other links, the problem of funds alone is a blade hanging above Xu Jiayin's head. Since the beginning of the year, the financing of more than 29 billion yuan sought by Evergrande Automobile has not moved, accompanied by frequent layoffs and production stoppages of Evergrande Automobile. Although Hengchi Automobile's Tianjin plant resumed production, this is only to solve Xu Jiayin's urgent need and continue to tell the story to creditors.
But there are a lot of tricks, the debt is higher than at the beginning of the year Evergrande, how to use such a very inaccurate financial report data to convince investors to debt restructuring? The premise of Dongshan comeback is that you have to have "Dongshan", Hengchi Auto has already been declared "dead" by countless media, how to convince shrewd creditors?
Evergrande's current valuable assets may be land reserves, but to realize land, it is necessary to start the process of development and sales, now the real estate is not good, many land reserves in 3 and 4 tier cities, the value of these land reserves may also shrink at present, and long-term non-construction may also have the possibility of recovery. Evergrande's current cash reserves are only 4.3 billion yuan, and unless the debt restructuring plan at the end of July is passed, Evergrande can refinance and revitalize the value of these assets, of course, this is only a very ideal assumption.
If Evergrande does not have the unlimited guarantee of Xu Jiayin's own assets and reputation, I am afraid it will be difficult to convince everyone of his determination to turn over.
Write at the end
Evergrande's high turnover looks more like a "drumming and passing flowers" game between Xu Jiayin and Evergrande executives. Evergrande Group not only fell deeper and deeper into the Ponzi financing trap created by itself, cocooning itself, but also caused regional companies and project companies to gradually lose control of financial and engineering management, unable to help themselves, regardless of good or bad, crazy to launch projects in various places, resulting in accelerated risk accumulation and eventually debt tail tail, and finally wrapped up in various complex situations such as upstream and downstream enterprises and relevant stakeholders.
Evergrande does not deserve sympathy, but the innocent victims who were forced to join this "capital game" deserve sympathy, especially the hundreds of thousands of buyers and Evergrande's suppliers. The fall of a real estate company like Evergrande is not the end of the problem, but the beginning of a series of problems. It is hoped that the new round of economic growth will no longer take real estate stimulus as the core, and let real estate completely walk out of the cycle, so as to develop healthily.
Resources:
2.4 trillion, Xu Jiayin poked out a shocking hole Source: Investors
Financial fraud is outrageous! Source: Yuke Real Estate
How big is Evergrande's debt black hole Source: Gelonghui
The disappearing 664.3 billion is the focus Source: 21st Century Business Herald
Tianliang Real Estate Debt Ruins Source: Teacher Yang's infrastructure classroom
How Vanke went through the crisis in three years Source: Financial Eleven
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