Company Research | Gambler Evergrande
Reporter | Tao Zidong
Edit | Wu Yangyang
Table organization | Lu Yanjun Tao Zidong
On the evening of July 17, 2023, China Evergrande (hereinafter referred to as "Evergrande") released two financial reports that surprised everyone.
One financial report is for fiscal year 2021 ended December 31, 2021. According to the financial report, Evergrande's revenue for the year was 250.01 billion yuan, with a net loss of 686.22 billion yuan and total liabilities of 2.58015 billion yuan. The other is for fiscal year 2022, as of December 31, 2022, Evergrande's revenue for that year was 230.07 billion yuan, a net loss of 125.81 billion yuan, and total liabilities of 2.43741 billion yuan.
The reason why these two earnings reports are amazing is partly because of the scale of debt. After the 2008 financial crisis, the Chinese government planned to spend only 4 trillion yuan on a national bailout plan from November 2008 to the end of 2010 to complete the 10 measures to expand domestic demand and promote economic growth. In 2022, the total GDP of Guangzhou, where Evergrande is headquartered, was only 2.88 trillion yuan. In contrast, the annual debt of Evergrande alone reached about 2.5 trillion yuan.
On the other hand, the rapid change in the scale of Evergrande's revenue is equally amazing. Compared with the high revenue of 507.3 billion yuan in 2020, Evergrande's annual revenue has been halved in 2021 and 2022, when money is most needed.
At the end of 2021, due to debt default, Evergrande's shares listed in Hong Kong have been suspended from March 21, 2022, and if the shares are suspended for 18 consecutive months, the company will face the risk of delisting. In its 2021 financial report, the company wrote: "Independent auditor Parsons Brinckerhoff is unable to express an opinion on the Group's consolidated financial statements for 2021. ”
Since the official implementation of the commercial housing policy in 1998, real estate companies have gradually grown into a "too big to fail" monster in the past 20 years. Land payments made by these real estate companies are the main financial revenue of China's local governments, and the upstream and downstream industrial chains built by them – steel, cement, household appliances, – account for more than 30% of China's GDP. Once any of these companies fail to deliver the house on time, countless families who have paid their entire wealth will fall into the trough of life.
According to Yu Liang, chairman of Vanke's board of directors, in the company's 2018 financial report, real estate development in the past 20 years has been a "golden age in which almost all participants can make money and it is difficult to lose money." This golden age has long been over with the acceleration of urbanization, but some of these companies have not accepted it and have sprinted more vigorously in the past few years. They seem to be betting that if they become the number one in the industry, they will be too big to fail.
Evergrande and Xu Jiayin, who founded it, are such "gamblers".
01
Speed is king
In the development history of Evergrande, there are several important time nodes: in 1996, under the leadership of Xu Jiayin, Evergrande first took shape; In 2009, Evergrande Real Estate landed on the Hong Kong capital market and became the private real estate enterprise with the highest market value in Chinese mainland at that time; In 2013, Evergrande's contract sales exceeded 100 billion yuan, officially joining the ranks of "100 billion housing enterprises"; In 2016, Evergrande became the king of real estate scale with annual sales of 373.4 billion yuan, and appeared on the "Global 500" list released by Fortune magazine, becoming the first real estate company in the world to appear on the list in only 20 years - the same year the Chinese real estate company also appeared on the list Vanke, which took nearly 30 years.
Xu Jiayin was born in a rural family in Taikang County, Zhoukou City, Henan Province, and the year after resuming the college entrance examination, he was admitted to the metallurgical department of Wuhan Iron and Steel Institute (now Wuhan University of Science and Technology), and after graduation was assigned to the state-owned Henan Pingdingshan Wuyang Iron and Steel Company.
Xu Jiayin's 10 years of work experience in the workshop of a state-owned enterprise has tempered Xu Jiayin's understanding of discipline and management, but he believes that his ability does not match his position. In 1992, Xu Jiayin decided to join the boom of going to the sea, he resigned from Wuyang Iron and Steel Company and went south to Shenzhen to become a grassroots salesman in a trading company.
Xu Jiayin soon showed his business talent, relying on his contacts in the original company, and soon after arriving at the post, he got a large order of 100,000 yuan for the new company. In 1994, Xu Jiayin proposed to his boss the idea of entering the Guangzhou real estate market, and then he came to Guangzhou Chengzhong Village from Shenzhen with four employees to start his first intrapreneurship.
According to early media reports such as Nandu Weekly, when the Guangzhou property market was prevalent in large apartments, Xu Jiayin did the opposite: his five-person team acquired a company through relevant channels and obtained a real estate project called "Zhudao Garden". In 1995, the first phase of Zhudao Garden all hundreds of houses were built into small apartments, and the prices were lower than the market price, which caused a sensation in Guangzhou.
This project had a profound impact on Xu Jiayin and Evergrande, and the development model with small apartments, low prices and high turnover as the core continued and gradually developed into the well-known "Evergrande model" - achieving rapid turnaround through efficient operation to hedge the overall profit margin of the project by high-cost financing.
The success of Zhudao Garden brought huge benefits to the company, but Xu Jiayin did not receive the ideal remuneration.
In 1997, Xu Jiayin registered Evergrande Real Estate Co., Ltd. and began to officially start a business. In horizontal comparison, that year, Country Garden led by Yang Guoqiang has been practicing in the real estate industry for 5 years, while Vanke led by Wang Shi has developed for nearly 10 years.
Land, capital and government relations are seen as the three elements of real estate development in China. Among them, the land is "flour", the house is "bread", how much land can be obtained, determines how much production resources real estate enterprises can master. Evergrande's rapid expansion since then is inseparable from Xu Jiayin's own pursuit of huge land reserves and scale, as well as Evergrande's own ability to acquire land.
Generally speaking, the land acquisition methods of modern real estate enterprises in China mainly include "recruitment, auction, listing", primary and secondary linkage land acquisition, project transfer under construction, equity acquisition and land acquisition, old land acquisition, etc. Taking the "bidding, auctioning and listing" policy as an example, before the introduction of the policy, state-owned enterprises occupied the main position in the real estate industry and formed a relative monopoly. However, after the introduction of the "bidding, auction and listing" policy, private capital has the opportunity to participate in the real estate industry, and land acquisition has become an important step for the development of real estate enterprises and marketization. A large number of private enterprises have thus gained the opportunity to rise rapidly, and Evergrande is one of them.
In 1997, Evergrande Real Estate won the site of the former Guangzhou pesticide factory located on Industrial Avenue, Haizhu District, Guangzhou, in the form of "bidding, auction and listing", and built Evergrande's first project - Jinbi Garden here. According to a number of media reports that year, the first phase of Jinbi Garden was sold at a loss, and was snapped up within two hours, achieving sales of 80 million yuan, and creating a "8 current year" record of land acquisition, construction in the same year, construction start in the same year, completion in the same year, sold out in the same year, sensation in the year, occupancy in the year, and income in the year.
With the reputation of Jinbi Garden, in only 3 years, Evergrande Real Estate ranked among the top ten in Guangzhou real estate comprehensive strength, and entered the top five in 2001. With the cash flow brought by the previous sales, Xu Jiayin led Evergrande to continuously acquire land and began a rapid march-style expansion.
Before 2004, Evergrande grew rapidly, but it was located in a corner of Guangzhou. It was also in this year that Xu Jiayin decided to get rid of the role of Guangzhou developer and go nationwide, and therefore formulated the development strategy of "scale + brand". Specifically, Evergrande's main job at this stage is to cultivate talents, acquire land, establish brands and find money.
According to the first prospectus disclosed by Evergrande Real Estate, from 1996 to 1997, Evergrande developed only one project in Guangzhou, and by 2004, the number of simultaneous projects developed by Evergrande had risen to more than ten, and the number of employees had climbed from less than 20 to more than 2,000, and in 2007 to more than 4,000.
In the selection of target cities, Evergrande did not set its sights on the north, Shanghai and Guangzhou in the early stage of development, but preferred municipalities directly under the central government and provincial capitals. In order to acquire land in these places, Evergrande sent an elite team of nearly 100 people to more than ten cities across the country, such as Wuhan, Chongqing, Chengdu, Shenyang, etc., to investigate the local land market.
As a result, Evergrande's land reserve expanded from less than 6 million square meters in 2006 to 45.78 million square meters at the beginning of 2008, which means that Evergrande's land bank increased nearly sevenfold in 2007.
The rush to list in Hong Kong was one of the main driving forces for Evergrande's crazy land acquisition in 2007. At that time, stimulated by the listing of mainland real estate enterprises with huge land reserves such as Country Garden, the absolute number of land reserves in the Hong Kong capital market was once an important indicator to measure mainland real estate enterprises. To this end, Evergrande had to rivet enough to take the land, which also laid the groundwork for Evergrande's subsequent huge land reserve.
The reason why Evergrande can get so much land in one year is because in addition to "bidding, auctioning and listing", the main land acquisition methods include secondary market land acquisition, agreement land acquisition, advertising land acquisition and so on.
Land acquisition in the secondary market is different from land acquisition in the auction market, which means that the project owner seeks a new land acquirer and transfers the equity by means of project transfer. Some small developers holding land encounter a large funding gap, and if they cannot start construction, they will face the pressure of land recycling, so they urgently need to sell the project; Large developers can avoid the feverish bidding of the land market, eliminating the intermediary link and obtaining the land plot of their choice. According to a 2009 report in the Oriental Morning Post, most of the land sources of the top ten real estate companies in the country, such as Vanke, Greentown and Evergrande, were second-hand markets.
Land acquisition by agreement is a "black box operation" type of land acquisition method that prevailed in the real estate industry in the early years. It refers to the ostensible "bidding, auction and listing" process, but in fact, the local government (mainly second- and third-tier cities) seeking to attract investment determines the developer in advance, and returns part or even all of the land transfer fee in disguise through a secret agreement, so that the developer can take the land at a low price.
In 2007, several media outlets reported that Country Garden had signed a secret agreement with the government of Yongding District, Zhangjiajie, Hunan Province, for allegedly "acquiring land at zero cost". A Southern Weekend report that year pointed out that land acquisition by agreement was a common model in China's real estate industry, while Viewpoint reported that Evergrande had "acquired more land through agreement transfers" in the past few years, and that the source of many land was not transparent.
It was during this period that Evergrande began to implement the "standardized boutique real estate" operation model across the country, that is, the house was completed when it was listed. According to the prospectus of Evergrande Real Estate, Evergrande has signed long-term direct supply agreements with well-known suppliers such as Otis, Moen, TOTO, and Siemens, so as to continuously expand the strategic supply chain and reduce costs by relying on scale effects.
In terms of management, Evergrande adheres to the management mode of "group close", establishes a strict standardized management structure, and stipulates that large-scale projects of branches in the whole country must be supervised by the head office for unified bidding. Clear rewards and punishments, strict rules and wolf nature are the key evaluations of Xu Jiayin's management style.
From setting the goal of going out of Guangzhou to expanding its business to 24 cities across the country, Evergrande took less than 5 years. Only 12 years after its establishment, Vanke expanded its business scope to 13 cities across the country. Since then, Evergrande's high-growth inertia has continued, like a footless bird, which can only keep flying forward.
After winning the national "sales championship" in 2016, Evergrande also wanted to respond to the call of the Central Financial Work Conference and change the development model of "three highs and one low" (high debt, high leverage, high turnover, and low cost), and transform from "scale" to "scale + efficiency". But judging from Evergrande's 2017 annual report, the "Big Mac" company did not really live up to its promises, but further increased its land reserves - that year, Evergrande added 126 million square meters of land, accounting for almost 50% of all real estate enterprises in the country.
02
Evergrande Wealth: The risk of being artificially erased from financial reports
On September 12, 2021, hundreds of investors went to the Houhai Center of Excellence in Shenzhen, where Evergrande was headquartered at the time, to protest and demand that Evergrande pay for overdue financial products. These protesters include people who bought Evergrande's houses, as well as Evergrande's own employees and contractors who have contracted Evergrande's construction projects, and in addition to these industrial chain links, these people have a common identity: investors in Evergrande wealth.
Real estate is a typical capital-intensive industry, large investment scale, long development process, real estate enterprises usually need to use various financing methods to ensure the normal operation of all links from land acquisition to sales: land transfer fees must be paid at the land acquisition stage, at this time it is necessary to purchase land through institutional advances; The development stage requires suppliers of the upstream and downstream industry chain to advance capital and borrow from financial institutions such as banks; The sales stage is inseparable from the personal housing loans of ordinary people. In a sense, the real estate industry is like a huge reservoir, attracting money from various channels into the field.
The deep binding of real estate and the financial industry provides more possibilities for real estate enterprises to innovate financing tools and means. 2015 is the year of the rise of the trend of Chinese mainland real estate financialization, and Internet finance was written into the draft of the "13th Five-Year Plan" and included in the national five-year plan proposal for the first time. In the same year, leading real estate enterprises such as Evergrande, Vanke and Country Garden all expressed their intention to "promote business innovation through financialization".
That is, during that time, some real estate enterprises represented by Evergrande accelerated the use of financial leverage on the one hand, and on the other hand, they also laid out the financial field through investment, shareholding, and even holding commercial banks, insurance institutions, trust companies, etc., so as to have zero distance access to funds. According to a research report released by Orient Securities in May 2022, from 2013 to 2016, the proportion of real estate financing in new social financing (referring to the total amount of funds obtained by the real economy from the financial system in a certain period of time) doubled, climbing from 16.2% to 37.5%.
Among them, the one at the forefront of all real estate companies is Evergrande. Between 2015 and 2019, Evergrande grabbed two major donors: China CITIC Bank and Shengjing Bank.
In March 2015, Evergrande signed a strategic cooperation agreement with China CITIC Bank and CITIC Trust, and the latter two institutions granted Evergrande a credit of 40 billion yuan and 20 billion yuan respectively. In the list of major correspondent banks listed in Evergrande's annual report, China CITIC Bank ranked first from 2015 to 2018.
Evergrande received more than just a simple bank loan from China CITIC Bank, in addition to this kind of funds that need to be clearly marked in financial reports, Evergrande and CITIC have also launched a variety of financial products that do not need to be written into statements (hence the name "off-balance sheet financing"). One of them is the "diversified industry buyout fund" specially set up for Evergrande's acquisition, and it is unknown how much of the funds will actually support Evergrande's expansion in diversified industries such as health, tourism, and automobiles.
China CITIC Bank's off-balance sheet financing to Evergrande may have long exceeded that of on-balance sheet financing. According to a copy of the "6-phase super-treasure collection plan (draft)" drafted by China CITIC Bank obtained by Caixin, in 2020, China CITIC Bank plans to set up a "diversified industrial M&A fund" with Evergrande with a scale of 40 billion yuan. In the first half of the same year, China CITIC Bank's loan to Evergrande was only 20 billion yuan.
Part of this diversified M&A fund comes from the wealth management funds of China CITIC Bank, accounting for 65%, and the attribute is "priority"; The other 35% of the funds are "intermediate and inferior", which are jointly subscribed by China CITIC Bank and Evergrande, Evergrande's two major financial businesses, Evergrande Life and Evergrande Financial, and Evergrande executives.
Among them, the part of the wealth management product subscribed by Evergrande executives has an attractive name - Super Treasure, which promises a yield of 25%. This figure not only reflects Evergrande's thirst for money, but also lays a trap for Evergrande's rapidly growing debt.
The thirst for funds made Evergrande decide to go down in 2016 and personally test a number of financial businesses.
In March 2016, Evergrande Financial Services (renamed Evergrande Wealth in 2019) was established, which provides financial services such as Internet payment, fund payment, prepaid card, fund sales, etc., and the expected annualized interest rate of the first batch of wealth management products is 5% to 10%. Relying on the listed company background of Evergrande Group, as well as the overwhelming celebrity publicity and social media marketing of that year, Evergrande Finance accumulated more than 15 million users within one year of its launch, with an annual transaction amount of 33.9 billion yuan.
In addition to this financial platform with a P2P nature, Evergrande also looks at a less risky platform - banks. In April of that year, Evergrande successively bought 17.28% of the shares of Shengjing Bank (formerly known as Shenyang Commercial Bank) through the secondary market and off-market block transactions, becoming its largest shareholder. In August 2017, Qiu Huofa, Chairman of Evergrande Finance, was assigned to Shengjing Bank as a non-executive director. A year later, Qiu Huofa was offered the position of vice chairman of Shengjing Bank. When the P2P platform experienced a severe crackdown in the industry in 2018, in May 2019, Evergrande Financial changed its name to Evergrande Wealth. The following month, Evergrande increased its stake in Shengjing Bank again, spending 13.2 billion yuan, jumping from 17.28% to 36.4%.
Through Evergrande Wealth, on the one hand, Evergrande Group issued the above-mentioned wealth management products with a yield of 25% to the executives of Evergrande Group companies, with a promised redemption period of two years and an individual subscription amount of 3 million yuan and above. On the other hand, it has also issued wealth management products to ordinary users through Evergrande Wealth that are difficult to calculate, and the whereabouts of the funds of these wealth management products are also difficult to know.
If you search the financial reports of Evergrande Group with the keywords "Evergrande Financial" and "Evergrande Wealth", you will find that it only mentioned "Evergrande Financial" once when it launched the financial platform in 2016, and since then, this part of the business has neither been independently listed nor appeared in the financial reports of Evergrande Group.
From the perspective of debt structure, the "contract liabilities" of unpaid construction materials to construction contractors and unfinished handover of houses to buyers account for the majority of Evergrande's debts, followed by bank borrowings. Taking 2021 as an example, of the total debt of nearly 2,580.2 billion yuan, contract liabilities reached 974.3 billion yuan, followed by 893.3 billion yuan of engineering materials payable, followed by bank borrowings of 342.1 billion yuan. The remaining RMB370.5 billion of debt is commercial paper, senior notes, non-controlling interests, etc.
The super-receipt of treasures issued to executives and the various wealth management products issued to ordinary users account for only a small proportion of Evergrande's debt. But those debts later became the trigger for Evergrande's debt crisis.
The hundreds of investors who protested at Evergrande's headquarters on the evening of September 12, 2021 purchased these wealth management products issued by Evergrande Wealth.
Since Evergrande began issuing Super Treasure in 2017, it has completely omitted all businesses and products related to Evergrande Financial and Evergrande Wealth in its financial reports. If it were not for the protests on September 12, 2021, the outside world would not know how much money Evergrande raised through this part of the financial business.
On September 14 of that year, Evergrande issued an announcement on the Hong Kong Stock Exchange that its two subsidiaries failed to fulfill their guarantee obligations for the issuance of wealth management products by third parties on time, with the relevant amount of about 934 million yuan. But according to figures provided by Du Liang, chairman of Evergrande Wealth, in a communication with protesters, the exposure of Evergrande's wealth management may be as high as 40 billion yuan, instead of the official claim of 934 million yuan.
It was only after Ant Group's listing was suspended in November 2020 that third-party wealth management product sales platforms began to come under relatively strict government attention, and more systematic supervision came after Ant experienced the "five major rectifications" from 2021 to 2023. The shrewd Xu Jiayin covered up his financial businesses before the "P2P governance" in 2018, allowing them to disappear from the public eye altogether.
It was not until July this year that the 2021 annual report and 2022 annual report were reissued that the company, which likes to make a fuss about its financial reports, revealed that the funds of these wealth management products used to be invested in Evergrande Group's projects in the form of "equity" (that is, non-controlling interests). On December 31, 2021, Evergrande reclassified the relevant amount of 34.445 billion yuan from "non-controlling interest" to "borrowings due within one year".
The 2021 and 2022 earnings reports do not say anything about the "over-receipt" offered to executives, and it is likely to be included in the aforementioned "borrowings due within one year" and not the "senior notes" explicitly listed in the financial report.
Before investors began to defend their rights against Evergrande Wealth on September 12, 2021, Evergrande's cash flow had actually experienced a crisis.
The "honeymoon period" with CITIC did not last long, since 2018, as the decision-makers proposed to increase financial anti-corruption efforts, Chen Xuying, then vice president of China CITIC Bank and president of Shenzhen Branch, and Sun Deshun, then deputy secretary of the Party Committee and president of China CITIC Bank, fell one after another, and in 2019 alone, four financial cadres of China CITIC Bank were investigated.
According to the feature film "Zero Tolerance" released by the Central Commission for Discipline Inspection and the State Supervision Commission in January last year, Sun Deshun, while at the helm of China CITIC Bank, publicly demanded that the entire bank stop manufacturing loans and tilt loan growth towards real estate, which directly led to the latter's growth rate of more than 40%. In addition, Sun Deshun is also good at using "shadow trading" to require the owner of a real estate company to inject funds into a platform company that is ostensibly unrelated to him but is actually controlled by him, and provides a huge loan credit line from CITIC. The investigation of the feature film shows that in addition to Evergrande, Sun Deshun also lent a large amount of money to real estate companies such as Kaisa and Huaxia Happiness during his tenure.
After receiving less support from China CITIC Bank, Evergrande's bank borrowings dwindled rapidly. In 2019, it also borrowed 462.1 billion yuan from banks, and by 2020, it only received 303.5 billion yuan from banks, a shrinkage of 34%. At the same time, on the one hand, Evergrande increased its control over Shengjing Bank - its shareholding in Shengjing Bank increased from 17.28% to 36.4%; On the other hand, it has increased its reliance on other financing instruments that cannot be included in financial statements — commercial paper, senior notes, over-receipts, wealth management products — which are expensive and short-lived compared to long-term funds at low interest rates by banks, and the game ends if a ball falls to the ground.
03
False prosperity brought about by financial means
The first ball dropped in 2021.
Judging from the past financial reports, Evergrande's financial situation seems to have suddenly begun to deteriorate from 2021: revenue was halved, and net profit turned directly from 31.4 billion yuan in the previous year to a negative 686.2 billion yuan. Also changing dramatically is its "contract liability," a type of debt that has received payments from customers but has not yet delivered goods (in the case of Evergrande, houses). In 2020, Evergrande's contract liabilities were only 185.7 billion yuan, and by 2021 it soared to 974.3 billion yuan.
There is only one reason that explains this sudden deterioration, and that is financial means. In fact, since 2017, China Evergrande has adopted an aggressive carry-over method, recognizing a large number of pre-sold listings every year as current revenue and profit, achieving a rapid increase in revenue and profit since 2017.
In 2016, Evergrande became the "scale king" of domestic real estate enterprises with a contract sales amount of 373.37 billion yuan, and in 2017 and 2018, Evergrande became the "profit king" of real estate enterprises for two consecutive years with a net profit of 40.51 billion yuan and 78.32 billion yuan. During the same period, although Country Garden's annual contract sales amount exceeded that of Evergrande, the annual operating income and net profit recognized by Evergrande were much higher than Country Garden's.
This financial maneuver is very tempting for Xu, and in addition to making Evergrande's financial statements look bright enough, it also gives Xu Jiayin and his senior management team a huge fortune. There are 3 listed companies in Evergrande - China Evergrande (referred to as "Evergrande" herein), Evergrande Property and Evergrande Automobile. Among them, Xu Jiayin's equity in China Evergrande alone reached 59.78%, and his wife Ding Yumei held 17.97%. Combined, the couple own 77.75% of the company, which once had a market capitalization of HK$359 billion (333.8 billion yuan). Between 2013 and 2019, Evergrande's dividend payout ratio (referring to the proportion that ordinary shareholders can distribute for every dollar an enterprise earns) was basically maintained at about 50%, and the dividend payout rate in 2017 was as high as 58.1%. For comparison, Vanke's average dividend payout ratio during the same period was about 37%.
Then, every year, senior executives such as founder and majority shareholder Xu Jiayin, executive director and CEO Xia Haijun, and Evergrande vice president Lai Lixin buy senior notes issued by the company and inject funds back into the company at high interest rates, ranging in size from tens to hundreds of millions of dollars and yields ranging from 6.25% to 12%. Unlike other commercial notes, the nature of these senior notes determines that when the company falls into debt crisis, the senior notes can be paid by the company first.
In 2022, the company is in deep trouble, Xu Jiayin's salary is only 126,000 yuan, and Xia Haijun, known as the emperor of part-time work, also received a salary of 21.231 million yuan - a lot less than the peak of 200 million yuan, but in the same year, Xu Jiayin, Xia Haijun and Lai Lixin still received 40 million yuan, 58 million yuan and 2 million yuan of senior note interest from Evergrande, respectively. The same is true in 2021.
Recognizing revenue and profits ahead of time has kept Mr. Xu and his executive team profitable no matter what, while ignoring all red flags. The 2017 policy of "housing is not speculation" and a series of CITIC Bank executives investigated for corruption since 2018 have failed to stop or slow Evergrande's expansion. At the 2019 Evergrande performance meeting, Xu Jiayin proposed to continue to adhere to the goal of "high growth" and strive to achieve trillion sales in 2022.
Xu may have benefited substantially from this financial approach to recognizing revenue in advance. However, this may not be the case with Evergrande.
Four years after adopting the above financial means, in 2021, due to working capital difficulties, Evergrande turned the revenue recognized in advance in the past few years back to "contract liabilities", with an adjustment amount of about 664.3 billion yuan. After being transferred from revenue, Evergrande turned directly from profit to loss of 686.2 billion yuan, and its net assets also fell to -473.1 billion yuan - insolvent, and the false prosperity was over.
04
Diversification is also a capital game
Most of the money raised from banks and Evergrande Wealth and the profits recognized in advance in the financial statements were invested in Evergrande's ambition to rush to the real estate boss. The other part has entered other areas that need to burn more money.
Since 2010, Evergrande has expanded its business in addition to finance, such as football, music, mineral water, health, grain and oil, dairy, and automobile.
In 2010, Evergrande announced its entry into the field of football. In November 2015, Evergrande Taobao, jointly owned by Evergrande and Alibaba, was listed on the New Third Board, becoming the first football club in Asia to land on the capital market, and later announced its delisting in December 2020. According to the prospectus and financial reports disclosed by the club, from 2013 to 2019, the club's losses were 576 million yuan, 483 million yuan, 953 million yuan, 812 million yuan, 986 million yuan, 1.829 billion yuan and 1.94 billion yuan, with a total loss of about 7.58 billion yuan.
Also in 2010, Evergrande established a cultural industry group, which is involved in theaters, music, film and television, brokerage, distribution, animation and other businesses. According to the financial data released by Evergrande Cultural Industry Group when it was planned to be listed on the New Third Board in 2015, from January to May 2013, 2014 and 2015, the company's net profit after deducting non-recurring profits and losses was -127 million yuan, -155 million yuan and -114 million yuan, respectively, and the cinema line, film and television, music, animation and other businesses were in a state of loss during the reporting period. In June 2021, the equity of Evergrande Cultural Industry Group changed, and the original shareholder Evergrande Group withdrew, and Duan Shengli and Yang Chao took over by natural persons.
In November 2013, Xu Jiayin took another look at the drinking water business - Evergrande Ice Spring. Evergrande Changbaishan Mineral Water Co., Ltd. submitted an application for listing to the New Third Board in July 2015, and withdrew its application in September of the same year. According to the application, from January to May 2013, 2014 and 2015, Evergrande Ice Spring lost 552 million yuan, 2.839 billion yuan and 555 million yuan respectively, with a total loss of 4 billion yuan in more than two years. In 2014 alone, Evergrande's annual sales expenses reached 3.25 billion yuan, of which 942 million yuan were advertising expenses. After burning money for 3 years, the Evergrande Ice Spring project was sold in September 2016.
In fact, it was not Evergrande that first proposed "diversification of housing enterprises" in the industry, but Vanke. The latter has also been involved in ten major industries such as import and export trade, retail chain commerce, real estate development, financial securities investment, and cultural film and television production. But in 1993, when Wang Shi discovered that he was losing more money than he was making, Vanke quickly abandoned this model and began to focus on the development of real estate and residential business.
However, Xu Jiayin, who has learned from the history of his peers, has not stopped, and he has been involved in almost all fashionable businesses in all eras since 2010.
After football, cinemas and bottled water, he looked at new energy vehicles again - Jia Yueting, who was also keen on diversification and packaged it as an "ecological" concept, fell on this business. Compared with cars, clubs, cinemas, and FMCG projects consume only a fraction of their funds.
The source of Xu Jiayin's enthusiasm for the automobile business does indeed come from Jia Yueting. In 2018, Evergrande announced a $2 billion injection into Jia Yueting's Faraday Future (FF), becoming its largest shareholder. Although this cooperation ended soon, it strengthened Xu Jiayin's determination to end up in person.
On August 14, Evergrande Automobile announced that the company received a strategic investment of about US$500 million from Newton Group, headquartered in Dubai, United Arab Emirates. In addition, Evergrande Group, Xu Jiayin and Ding Yumei will also provide about 19.425 billion yuan in loans to Evergrande Auto - at this time, the parent company engaged in real estate business, Evergrande still owes more than 2 trillion yuan to the outside world. After converting these investments and borrowings into shares, Newton Group, Xu Jiayin and Ding Yumei will receive 27.5%, 4.07% and 3.51% of the equity of Evergrande Automobile, respectively. Together with the indirect shareholding of Evergrande Automobile by Evergrande Group, Xu Jiayin and Ding Yumei hold 32.08% and 11.93% of Evergrande Automobile's shares respectively.
Xu Jiayin clearly sees Evergrande as a way back, and new energy vehicles seem to have more future than the real estate business. However, the word future does not belong to Evergrande Automobile.
Although Evergrande Auto received investment from well-known institutions such as Tencent, Sequoia Capital, Yunfeng Fund, and Didi Chuxing in 2020, NIO, Xpeng, and Li Auto were all established around 2015. When the head brand has laid down the advantages of technology, production and sales, and the market pattern is formed, it is difficult for Evergrande Automobile, which has just entered the market, to enter the consumer's choice range. Its first model, the Hengchi 5, went into mass production in September 2022, and no more than 1,000 units were delivered in the six months until the end of April this year. In contrast, the current leading new energy vehicle manufacturing forces can deliver 10,000 to 50,000 vehicles per month.
As of December 31, 2022, Evergrande Auto had a cumulative loss of about 91.673 billion yuan, total liabilities of about 183.872 billion yuan, and net assets of -68.65 billion yuan.
Whether Newton's $500 million will materialize is also unknown. According to public information, the actual owner of Newton Group is Chinese businessman Alan Nan Wu, who founded an electric vehicle company called ICONIQ Motors in 2016, and the company had no revenue from 2020 to 2022.
One of the reasons for the breakdown of the cooperation between Xu Jiayin and Jia Yueting in 2018 was that the $2 billion promised by Evergrande had not fully arrived, and Jia Yueting may not even receive $800 million, and both wanted to be Faraday Future (FF) the largest shareholder.
If Evergrande Group, Xu Jiayin and Ding Yumei do not inject 19.425 billion yuan into Evergrande Automobile, Xu Jiayin's shareholding in Evergrande Auto will only be 28.01%, and the shareholding ratio of Newton Group, which claims to invest 500 million US dollars, may be comparable to it.
Xu Jiayin paid to avoid a repeat of the tragedy of 5 years ago. It's just that he may be able to guarantee that Evergrande Auto does not change owners, and may not guarantee that it will make money, and his leader in the automotive field, Jia Yueting, has not done it.
In the March 22 announcement, Evergrande said that its core tasks in the next three years are to "resume work and production" and "ensure the delivery of buildings", and it is expected to need 250 billion yuan to 300 billion yuan in financing. As for the "guaranteed delivery of vehicles", 29 billion yuan is required.
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