Commentary on Political Economy

Monday 26 October 2020



Why China Evergrande’s Investors Can’t Afford to Force a Default

Bloomberg News
  • Developer’s strategic investors rely on Evergrande for revenue
  • Several backers signed big contracts after making investments

To understand why some of China Evergrande Group’s strategic investors agreed to throw the embattled developer a $13 billion lifeline last month, look no further than their own sources of revenue.

Interior decorator Grandland Group Holdings Co.’s listed unit gets almost 58% of its sales from Evergrande. Hangzhou Robam Appliances’s sales jumped after deepening its cooperation with Evergrande. And the developer has been the largest source of revenue for door maker Beijing Jiayu over the last four years, according to company filings.

With such strong ties to the indebted real estate firm, many suppliers agreed to waive their rights to a combined $13 billion repayment just five days after Evergrande became embroiled in a crisis of confidence. The company warned in August it faced a potential default if it had to make the 130 billion yuan ($19 billion) payment to these backers by a Jan. 31 deadline, according to people familiar with the matter. Evergrande remains in talks with investors owed the remaining $6 billion.

As part of the new deal, several strategic investors agreed to keep their shares and not require the company to buy them out, according to a filing. The agreement turns their hybrid securities into common shares in Evergrande’s property unit, said Raymond Cheng, a property analyst at CGS-CIMB Securities. Company officials told investors in an Oct. 16 call organized by Bank of America Corp. that the new agreement doesn’t include any put options.

Traditional Backers

Evergrande didn’t immediately reply to requests for comment, nor did any of the companies listed below. Evergrande hasn’t spelled out which of the investors were included in the group that agreed to waive the $13 billion repayment. The photo taken last month to announce the deal included executives from Grandland, Suning Appliance, Jiayu, Robam and Zhejiang Youpon Integrated Ceiling.

Among the holdouts is Evergrande Group’s largest strategic investor, Shandong Hi-Speed Group, which is leaning toward demanding repayment of the $3.4 billion it’s sunk into the embattled developer, according to people familiar with matter.

Here’s a rundown of how many of these investors are intertwined with Evergrande:

  • Suning Appliance Group Co.: As Evergrande’s second-largest strategic investor, Suning invested 20 billion yuan in the third investment round in late 2017. A month later, Suning teamed up with Evergrande to expand its brick-and-mortar business, with Evergrande opening stores in more than 500 residential communities. The next year, Evergrande invested 10.2 billion yuan into a joint venture with Suning. Evergrande’s insurance unit also invested in at least three property development projects owned by Suning around the time of the investments.
  • Grandland: The Shenzhen-based decorating firm has been an Evergrande supplier since at least 2007. Evergrande has been the biggest customer for its main listed unit Shenzhen Grandland Group Co., contributing between 42% to 58% of sales from 2010 to 2019. The annual contribution now exceeds Grandland’s strategic investment of 5 billion yuan, according to annual reports. Grandland’s accounts receivables from Evergrande exceeds its cash balance.
  • Hangzhou Robam Appliances: The Hangzhou-based kitchen appliance firm said it made a strategic investment of 100 million yuan in Evergrande in 2017 to “keep the business relationship.” Sales surged in 2019 after it deepened its cooperation with Evergrande, according to its annual report.
  • Jason Furniture Hangzhou Co.: Weeks after its 503 million yuan investment, the furniture maker received Evergrande contracts worth four times the value of its investment.
  • Guangdong Vanward New Electric: Six months after the heater maker invested 200 million yuan in Evergrande, the developer agreed to purchase goods in the same amount.
  • Zhejiang Youpon Integrated Ceiling: Two months after its 300 million yuan strategic investment, the integrated ceiling maker received contracts worth three times that total.
  • Shum Yip Group Ltd.: The property service provider’s listed unit, with business confined to China’s larger cities, said its strategic investment in Evergrande can help tap new markets.

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