Qin Shuo: How can the actual controller of a defaulting company with a debt of 2 trillion yuan pay dividends of 50 billion to himself?
· This is the 5432nd original debut article Word count 5k+ ·
Like any group, the private entrepreneur group presents a bell-shaped probability distribution. On one side are good examples, on the other side are bad examples, and most of them are in the middle.
If a society does not punish the bad model, it will distort the incentive mechanism, form a negative demonstration effect, and eventually cause the distribution shape of the group to tilt towards the bad typical end.
So, what kind of company is a good company and a good example?
What a good business looks like
In a narrow sense, a good enterprise should create value for society and create value sustainably. This value refers not only to the profit, but also to the opportunity cost of the profit exceeding the capital used. If the profit is less than the opportunity cost of the capital used, it is more cost-effective for society to give this capital to other more efficient enterprises.
The difference between profit and the opportunity cost of capital is called economic value added (EVA). If the economic value-added is positive, it means that the enterprise is creating value for the society; If the economic appreciation is negative, it means that the enterprise is destroying value.
Fortune 500 companies, if you calculate the economic value-added, many are negative. The Fortune 500 is ranked by size, and it is actually the top 500. If inefficient, the larger the enterprise, the more social value it destroys.
If a society is infinitely expanded by a company that destroys value, it is like the infinite expansion of cancer in the body.
Broadly speaking, good companies fulfill their obligations and responsibilities to their stakeholders.
The stakeholders within the enterprise are the employees.
The stakeholders outside the enterprise are the upstream and downstream parties of the industrial chain at the product and service market end, and for real estate enterprises, they are mainly construction enterprises and sales enterprises.
At the capital market end, it is mainly creditors, that is, people who provide debt funds for enterprises, mainly financial institutions; There are also equity holders, that is, those who provide equity funds for enterprises, because equity holders are the owners of the enterprise and the enterprise itself, so they are not stakeholders in a narrow sense, but large companies, especially listed companies, there will be inconsistencies between the interests of large shareholders and minority shareholders within the rights holders, so minority shareholders are also stakeholders.
In addition, another stakeholder is the government, and companies pay taxes according to the law.
A company should be a good business if it fulfills its obligations and responsibilities to all of these stakeholders.
Of course, the big premise is legal compliance. Like Evergrande Wealth, it is illegal fundraising, related party transactions, and self-financing, which is obviously illegal, and it is another matter.
Although Evergrande Real Estate did not directly violate the law like Evergrande Wealth, it was about to go bankrupt, which was obviously not a good enterprise, and the bankruptcy posture was so ugly.
The long-term divergence between profit and cash will be tricky
Like other enterprises, real estate enterprises also have three activities: business activities, investment activities, and financing activities. Note that interest payments are generally considered business activities. These activities correspondingly generate three cash flows.
In 2020, Evergrande's cash flow from operating activities, investment activities and financing activities was RMB110 billion, -RMB24 billion and RMB76.88 billion, respectively. In 2019, they were -67 billion, -55 billion and 143 billion, respectively.
Why did the cash flow from operating activities suddenly change from -67 billion the previous year to 110 billion in 2020? Because this year, Evergrande fully entered the "debt mode", extended the account period of the construction party/supplier or used supply chain financing tools such as commercial paper on a large scale, and owed large amounts of accounts to construction enterprises and sales enterprises. If the accounts of each link in the industrial chain are paid on time, its operating cash flow should still be negative, and the negative is not small.
In fact, from 2013 to 2019, except for 2018, Evergrande's operating cash flow was negative every year, especially in 2017, which was -150 billion. These seven years have accumulated -330 billion. In the same period, Vanke was positive at 260 billion.
In the past seven years, Evergrande's cumulative profit has been 200 billion yuan, which is 530 billion yuan more than the cash flow from operating activities. In 2017 alone, profits were 180 billion higher than cash flow from operating activities. Vanke's cumulative profit in the past seven years was 230 billion yuan, which was 30 billion yuan less than the cash flow from operating activities.
On the one hand, these figures reflect the impact of Evergrande's purchase of land on operating cash flow, and land is like raw materials for real estate enterprises, which belongs to operating activities, so the cash outflow of land purchase belongs to operating cash flow. For non-real estate enterprises, the cash outflow of land purchase belongs to the cash flow of investment activities.
As of the first half of 2021, Evergrande has 214 million flat soil reserves, with an original value of 456.7 billion yuan. We use the figure of 456.7 billion as the cash outflow of land purchases from 2013 to 2019, which should be roughly the same.
Combined with the 456.7 billion cash outflow from the purchase of land, Evergrande's operating cash flow is -3300 + 4567 = 126.7 billion, which is 73.3 billion less than the profit. In other words, the cumulative profit in seven years is 200 billion yuan, which is 73.3 billion more than the cash flow of operating activities, accounting for more than 30% of the total profit.
In accounting, the difference between profit and cash flow from operating activities is a vane to examine the "accounting creativity" of an enterprise, because profits can be "done" through various operations, while cash is difficult to "do", of course, non-payment is another problem.
The difference between profit and cash for a year or two can be explained, but the long-term disconnection is likely to be making false accounts. Every serious accounting fraud case in history has had this indication.
Inflated sales revenue is an important way to make false accounts, and there are many specific methods, from recognizing sales revenue in advance to fabricating sales revenue out of thin air.
On July 17, 2023, Evergrande finally released the 2021 and 2022 results announcement (the previous 2021 annual report could not be issued for various reasons), "revenue decreased by 664.3 billion yuan", although it was expected, the market was still shocked.
That is, the previously recognized revenue was inflated by 664.3 billion yuan. The reason for the reduction given in the annual report is "due to its own accounting treatment change", believe it or not.
Evergrande dividends, rain or shine
As we all know, dividends are paid after profits, and profits must be made to pay dividends.
The simple truth is that shareholders are the owners of the company and the final bearers of the company's risks. The company sells products and services, obtains sales revenue, pays supplier payments, office building utilities, employee salaries, bank interest, government taxes and other costs and expenses, and finally if there is a surplus, all belong to shareholders, called profits, shareholders can decide to leave part or all of the profits in the company to continue to operate and develop, the part of the profits other than retained profits is distributed to shareholders, called dividends.
If the company has no profit and is a loss, then the shareholders must bear the loss and cannot share the money from the company, because you have not made money, how can you share the money? Losses are divided into money, and you share the money that should belong to suppliers, employees, banks, governments and other stakeholders, which is to grab money.
It's easy to grab money, just turn losses into profits, and then the board of directors passes a resolution to pay dividends. There is also a technical detail here, dividends are to be paid in cash, you can't use profit dividends on the income statement, which is a visible abstract figure under accrual, not real money that can be touched. Evergrande, on the other hand, is short of cash, has no money to pay suppliers, no money to pay banks, no money to pay investors, but it has money to pay dividends to shareholders such as Xu Jiayin.
From 2010 to 2020, except for 2017, Evergrande paid dividends every year, and the proportion continued to increase, from 10% in 2010 to 60% in 2018, and remained at about 50% in most years. Xu Jiayin holds about 70% of the shares, and has received a total of 51.1 billion yuan in dividends in ten and a half years.
In 2017, the year that Xu Jiayin became China's richest man was also the year when Evergrande's situation took a sharp turn. The cash flow of operating activities in that year was -150 billion yuan, the profit was 37 billion yuan, and there was no dividend, and then Evergrande accelerated its dividends, and in 2018 and 2019, Xu Jiayin's dividend income was 25.72 billion yuan. In 2020, Evergrande has been embattled, and Xu Jiayin also paid dividends of 6.536 billion. In June 2021, just three months before the outbreak of the Evergrande wealth rights protection incident, Xu Jiayin also received 1.527 billion dividends.
On July 15, 2021, Evergrande issued another announcement to discuss the payment of a special dividend, which the market questioned to "hollow out the listed company", and then on July 27, the company announced its decision to cancel the special dividend plan. If not stopped, Xu Jiayin is ready to pay dividends to himself again.
This is a very strange thing, Evergrande is in a debt crisis, Xu Jiayin while arrears of accounts for all links of the industrial chain, while all parties rush to call for help, and even wrote to the Shenzhen municipal government, saying that there are more than 8,000 enterprises in the industrial chain, if Evergrande is not allowed to complete the backdoor listing and obtain funds in time, the consequences are unimaginable.
But at the same time, Evergrande dividends, rain or shine. No profit, make profit; No cash, borrow cash; Companies are heavily indebted and crumbling, and dividends continue to flow into private pockets.
Who is still locked up at the bottom of hell?
The accounting firm that Evergrande has been "using" since its listing in Hong Kong in 2009 is Luo Shenmei (i.e. PricewaterhouseCoopers).
In October 2021, shortly after the Evergrande Wealth Storm, the Financial Reporting Council of Hong Kong issued a communiqué investigating Evergrande Group's reporting on continuing operations, including conducting an inquiry into its financial statements for 2020 and 2021 interim accounts. It also launched an investigation into the audit conducted by PricewaterhouseCoopers on the 2020 accounts.
The FRC mentioned in the communiqué that PwC issued an unqualified opinion in China Evergrande's 2020 annual audit report, and did not mention the material uncertainty of Evergrande's operation. Accordingly, the FRC questioned whether Evergrande's accounts complied with applicable financial reporting standards and whether PwC complied with auditing standards.
Munger abhors false accounting, saying: "In my opinion, making false accounts is tantamount to pumping steel out of the concrete when building high-rise apartment buildings, and the industries and countries that allow it will learn a hard lesson." ”
He believes that the destructive effect of making fake accounts is greater than that of those tofu dregs projects that kill people, because unscrupulous builders find it difficult to excuse themselves when the building collapses and crushes people, and accountants who make false accounts are more hidden and often can successfully escape, so fake accounts are much more than tofu dregs.
He also wrote a fable in which God decided to deal with a serious financial scandal. He called the chief detective and said, "Smith, I want to deal with this matter fairly and strictly, and you go and bring in the sinners who are most responsible for this." ”
Smith first brought in a group of securities analysts who God believed were making low-level cognitive mistakes, mostly caused by secular standard incentives, that they happened subconsciously, and that the harshest punishments could not be imposed.
Smith brought in a group of SEC commissioners and high-ranking politicians. God said, "These people are swayed by many regrettable forces, and they are also self-conscious, and it is unreasonable for you to expect them to follow the right code of conduct." ”
Smith brought in the executives of the business again, and God said, "You're pretty much right, and these people will be severely punished." But what I want you to catch is the bastards who are going to be sent to the bottom of hell, those who could have easily prevented this catastrophe. ”
It dawned on Smith that the lowest level of hell was for betrayers. He captured a group of old men in purgatory, who had been partners in major accounting firms. God is happy: "You caught it right!" The judicial system is influenced by the business community, which wrongly sentences them lightly. Now you can send them to the bottom of hell. ”
Munger argues that accountants have betrayed the public's trust in them more than securities analysts, regulatory officials, politicians, and corporate executives.
After the accountant makes a profit, it must also be approved by the board of directors before dividends can be paid. Why didn't the independent directors on the board block Xu Jiayin's dividend proposal? Not even objections were raised. The duty of independent directors is to prevent the internal control of controlling shareholders and management from harming the interests of the company as a whole, including the interests of minority shareholders, and failure to fulfill this fiduciary duty can lead to conviction in serious cases.
Under the endorsement of the accountant, Evergrande has profits every year on the account; With the permission of independent directors, Xu Jiayin pays a large percentage of dividends almost every year.
What Xu Jiayin did with this money is another matter. If dividends are justified, how he spends his money, airplanes, yachts, luxury watches, BMW cars, football stars and beauties, set up family trusts to ensure that future generations enjoy the wealth, that is his freedom, everyone should also have the freedom to dispose of their wealth; But if the dividend is illegitimate, then even if the money is used for charity, it will also be held legally responsible.
Some people say that Evergrande is a limited liability company and an independent legal person, Xu Jiayin is Xu Jiayin, a natural person, although it is a major shareholder, but each shareholder of a limited liability company bears limited liability to the company within the amount of capital contribution subscribed, not full liability, and the company bears full responsibility for the company's debts with all its assets.
This is true, but if the dividend is a dividend of profit made by making false accounts, should the corresponding responsibility be investigated? It is not known whether the Hong Kong government's investigation of PwC will follow-up.
What to take "to defend the dignity of Eastern enterprises"?
In addition to accounting firms and independent directors, Evergrande has also received the blessing of mainland rating agencies. On May 7, 2015, Standard & Poor's, one of the world's three major rating agencies, downgraded Evergrande's long-term corporate credit rating from "BB-" to "B+", with a negative outlook. It was unanimously "counterattacked" by the three major rating agencies in the mainland (China Chengxin International, Dagong International and United Ratings), and they all gave Evergrande the highest credit rating AAA, and the rating outlook was stable.
In fact, on June 21, 2012, Citron Research, a U.S. short-selling agency, published a 67-page short selling report on Evergrande, pointing out that Evergrande would be unable to pay its debts and that there were at least six serious accounting frauds.
Evergrande reacted quickly, issuing a short announcement at noon that day to clarify, and held a conference call at half past one in the afternoon, with Chairman Xu Jiayin and President Xia Haijun personally attending to respond to investors' questions. The next day, Hui Jiayin said at the Global Investor Conference in Hong Kong: "This is a war in peacetime! They are aggressors, bandits, robbers! We must completely crush these marauders and defend the dignity of Eastern enterprises! ”
Now that I think about it, this sentence is very ironic, who is the predator? Who is defending the dignity of Eastern enterprises?
Subsequently, nine well-known international investment banks, including Citibank, Deutsche Bank, Bank of America Merrill Lynch, JPMorgan Chase and Credit Suisse, issued reports supporting Evergrande, accusing citron of not understanding the actual situation of China's real estate industry and the basic accounting standards of mainland enterprises, and maliciously shorting.
On July 4, 2012, Evergrande Real Estate also brought a group of lawyers to report the case to the Commercial Crime Bureau of the Hong Kong Police Station on citron's research on shorting Evergrande.
In August 2016, the Hong Kong Securities and Futures Commission ruled that Andrew Leifer, head of citron research, had disclosed false or misleading information to induce others to trade, ordered him to hand over HK$1.6 million in profits from his short sale of Evergrande, and prohibited him from trading securities in Hong Kong for five years.
Not satisfied, Andrew Lefort filed two appeals, which were dismissed in January 2017 and February 2019.
Since then, I have never heard of any short-selling institution daring to publish a report on shorting Evergrande, but Evergrande's thunder is still stormy. If you don't solve the problem, only the person who raised the problem, it will not work in the long run.
When Evergrande just thundered two years ago, Cao Dewang once lamented: "Xu Jiayin has a total registered capital of 3.9 billion yuan, and the loan can achieve two trillion yuan." Of course, strictly speaking, two trillion yuan is not all "loans", loans generally refer to interest-bearing liabilities lent to it by financial institutions, and as of 2021, Evergrande's loan is 570 billion yuan. Others are supplier arrears, advance payments to buyers, plus hidden liabilities.
3.9 billion yuan of own funds allowed Xu Jiayin to obtain 2 trillion yuan in credit, and various violations of laws and regulations affected the fate of countless families, companies and individuals. Our society, especially the government department, should reflect on how the actual controller of a defaulting company with a debt of 2 trillion yuan can give himself 50 billion dividends. How can a company with a registered capital of only 3.9 billion yuan end up with a debt of 2 trillion yuan? In this process, why can Evergrande always be unimpeded?!
「 Picture | Visual China "