Chinese developer Evergrande reveals $81bn loss from property crisis

Chinese property developer Evergrande has posted losses of $81 billion (€72 billion) over a two-year period, revealing for the first time the financial fallout of a 2021 default that sparked an ongoing crisis in the country’s property sector.

The group, which is in the midst of a lengthy restructuring process after it failed to make bond payments almost two years ago, reported losses of Rmb476 billion (€58 billion) and Rmb106 billion for 2021 and 2022 respectively. Revenues halved in 2021 to Rmb250 billion, compared with Rmb507 billion a year earlier.

Evergrande doubled down on China’s property boom to become the world’s most leveraged developer and later embodied the sector’s struggles when its default shocked global markets in 2021.

“The release of results seems to indicate that management and regulators have finally accepted that a housing rebound isn’t imminent,” said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital in Hong Kong.

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“Recent economic data shows that Evergrande cannot simply wait until the current crisis passes and then release results in a more favourable environment.”

The company’s problems precipitated a wider cash crunch across China’s property sector, which remains paralysed at a time when policymakers are also grappling with trade headwinds and a weaker-than-expected post-Covid recovery.

Evergrande’s long-delayed financial reports are the first glimpse into the scale of the company’s plight, which has thus far been characterised by a lack of disclosure and highly opaque discussions with creditors.

They show that the company’s total liabilities, which measured about $300 billion at the time of its failure, increased to $340 billion by the end of last year – an indication of the difficulties the company, the government and investors face in resolving the weaknesses of a sector that accounts for over a quarter of China’s economic activity.

“Evergrande’s results show a company that no longer has a business model capable of supporting its existing debt. A politically difficult and economically painful sector bailout is on the way, even if Beijing hasn’t yet accepted this reality,” said Mr Silvers.

Trading in Evergrande’s Hong Kong-listed shares has been halted since March last year, pending the 2021 and 2022 financial results. It risks being delisted if shares are suspended for 18 months. The company said in its filing that trading would remain suspended.

In a separate filing on Monday, the company said it was aiming to convene meetings with creditors next week as part of a restructuring process that has not been fully approved yet. At the time of its default, Evergrande had borrowed about $20 billion from international investors, who are set to receive notes linked to shares in Hong Kong-listed subsidiaries, according to the plan.

“The financial statements provide little evidence the group can normalise operations after a debt restructure,” said Charles McGregor, head of Asia at Lucror Analytics.

Many of its peers, including Sunac and Kaisa, have similarly defaulted on their offshore debts. Kaisa was last week subject to a winding-up petition from an investor in Singapore holding mainland debt.

Beijing has so far sought to prioritise completion of residential housing projects, which in China are often purchased prior to construction work being finished.

In November, the authorities released a 16-point plan to support the sector that encouraged consolidation, but its efforts mainly support so-called high-quality developers that have not defaulted.

Policymakers in China initially sought to control the property sector in 2020 by introducing limits on leverage that contributed to a freeze on new funding and the eventual cash crunch.

Hui Ka Yan, formerly China’s richest man, has come under pressure to sell his own assets as part of Evergrande’s collapse. He remains chair of the company and signed off on the financial results.

Evergrande was audited by Prism Hong Kong and Shanghai Limited after previous auditor PwC resigned. Prism said there was “material uncertainty” over the company’s ability to operate as a going concern, but the firm was unable to obtain sufficient audit evidence to give a proper opinion.

Hong Kong authorities launched an investigation into PwC and Evergrande last August over potential concerns about the 2020 accounts of Evergrande Property Services, which is listed in the city. – Copyright The Financial Times Limited 2023