Hui Ka Yan attends Evergrande’s earnings announcement at the JW Marriott in Admiralty on March 29, 2016.
Nora Tam/South China Morning Post via Getty Images
Hui Ka Yan became Asia’s wealthiest person as his fortune was soaring to a peak of $45.3 billion in October 2017, but a large portion of his gains proved to be short lived. His fortune, which is based mostly on his stake in Hong Kong-listed Evergrande, has seesawed back down to its current level of $32.8 billion as the property developer was pushed in opposing directions by a series of share buybacks and dividends against pressure from short-sellers.
Investors’ divergent views on Evergrande are attributed to the massive debt pile Hui built while accumulating the company’s land holdings and making investments in a variety of businesses that range from theme parks and a soccer club to hospitals and mineral water, although his latest plan to turn the property developer into an electric-vehicle brand may turn out to be his riskiest venture yet.
“They are very financially stressed,” says Nigel Stevenson, a Hong Kong-based analyst at research firm GMT Research. “ They have a continuous need to refinance their debt, so it is a continuous search for new forms of borrowing.”
Evergrande issued $6.7 billion of corporate debt this year, making the company the biggest borrower in Asia’s bond market excluding Japan. The company says it intends to use the proceeds to pay down some of its existing debt as well as funding Hui’s ambition of producing electric cars.
More On Forbes: China Real Estate Developer Hui Ka Yan Becomes Asia’s Richest Man
A large chunk of Evergrande’s net debt–which Stevenson estimates stood at 475 billion yuan ($70.6 billion) by the end of last year–was accumulated during a previous debt binge that saw the company borrow heavily to acquire low price land throughout China. As the country’s property market soared, Evergrande became its second-largest real estate developer by sales, once registering a nine-fold increase in profit that sent its shares rallying more than 400%.
But funding challenges loom large. The company pledged in 2017 to cut its debt pile amid growing concerns among investors. Evergrande’s net gearing ratio, a measure which compares net debt against the book value of its equity, had soared to 240% by June 2017, and the company said it would reduce it to about 70% by June 2020. Although Evergrande had managed to get its net gearing ratio down to 151.9% at the end of 2018, it still faces significant short-term refinancing pressure. The company has $47.3 billion in debt maturing in the next 12 months or less, an amount far exceeding its cash holding of $30.4 billion, according to the company’s 2018 annual report.
And Hui is adding to this funding challenge by investing heavily in various units of unrelated businesses. In March, he declared his ambition to make Evergrande the largest EV maker globally in the next 3-5 years, and the company recently signed agreements to invest tens of billions of dollars to build manufacturing facilities in China.
Meanwhile, Evergrande Health, a separately listed unit, has spent more than $1 billion for investments that include acquiring control of National Electric Vehicle Sweden AB (NEVS), a majority stake in battery maker Shanghai CENAT New Energy and buying British electric motor maker Protean. Analysts say Evergrande will need to make at least $3 billion in upfront investments and acquire a great more expertise in order to begin producing cars.
“The battery company they acquired isn’t a very high-ranking one,” says Yale Zhang, a Shanghai-based analyst at research firm Auto Foresight. “Evergrande really has a long way to go before becoming a meaningful auto company.”
A company spokesperson said Evergrande’s goal of reducing debt “remains unchanged,” and it will do so through measures that include controlling costs, paying down debt with its own capital and introducing partners for project development.
More On Forbes: China’s Former Richest Man Expects Lowest Sales Growth In Five Years
To be sure, some analysts expect Evergrande’s debt problems to be kept within manageable limits. The company is forecasting its slowest sales growth in five years as China’s economy loses momentum. And this could be a blessing in disguise as a slowing market means it doesn’t need to spend as much to acquire land and can instead focus on monetizing existing projects, says Franco Leung, associate managing director at Moody’s.
Property developers tend to generate higher cashflow when growth slows because they spend less on land while collecting revenues from the sales of projects developed during previous years, says Paul Lukaszewski, Singapore-based head of Asian corporate debt and emerging-market credit research at Aberdeen Standard Investments. Plus, the company has so far demonstrated “easy access to funding,” he says, as it has successfully tapped public bond markets three times this year.
But it is difficult to predict how long this access will last. Investors buying Evergrande’s bonds have mostly been attracted by high yields, and in a vote of confidence, Hui himself once spent $1 billion of his own money to buy the notes.
Beijing’s expected support may also play a role, as some of Evergrande’s investors are China’s offshore fund managers. They might be willing to take on added risks due to a belief that the government will bail the company out if anything goes wrong, says GMT Research’s Stevenson.
“Some of which eventually becomes a political question,” he says. “It depends on to what extent the banks would be encouraged to keep the taps open.”