Evergrande is still kicking!?! I can smell that corpse from here
Last week I talked about the massive over-supply of apartments in China.
This has big implications for Australia, since it’s our iron ore that has driven the massive Chinese retrofitting project.
Good numbers are hard to come by, but then last week we got one reliable number out of one Chinese property developer.
And it was ugly.
The company was Evergrande. At one stage Evergrande was the biggest property developer in China and it was massive.
But then in 2021 it got into financial trouble, and it failed to make payments on US$1.2bn of international loans.
(Apparently it has debts worth something like $300bn! That’s ginormous.)
Nobody thought a company of that size going under would end well, but then it just sort of dropped out of the news cycle.
It’s shares were suspended from trading in March last year… but it wasn’t in receivership. It wasn’t in administration.
It was in China. And things are done differently there.
Anyway, out of the blue last week, it makes a massively late report to the stock exchange in Hong Kong where it’s listed.
It let investors know that they lost a staggering US$81.1 billion in 2021 and 2022, as revenues were cut in half.
Again, how this company is still in business is beyond baffling.
But as I was saying at the time, Evergrande is high-profile, but this isn’t an isolated incident.
An analyst I follow looked at the numbers on the 20 biggest developers in China. The numbers are mind-numbing.
First is the Inventory / Sales ratio. It’s 0.9 for US builders. It’s 2.5 in China meaning it would take 2.5 years to sell all the property in their inventory.
But no one’s buying… because of the massive glut I’ve been talking about.
But it gets worse.
For every $1 of market cap, the median US homebuilder has 7 cents of debt.
For every $1 of market cap, the median Chinese homebuilder has $9.90 of debt.
Yes, if that number sounds absurd to you, it’s because it is.
Likewise, for every $1 of sales, the median US homebuilder owes $0.06 to suppliers and employees, and owes $0.01 to people who have paid deposits.
That’s what a manageable business looks like.
But in China, for every $1 of sales, the median Chinese homebuilder owes $0.56 to suppliers and employees, and owes $1.43 to people who have paid deposits.
That is, they’re underwater and depositors aren’t getting their money back.
Again, how these companies aren’t in administration is beyond me.
But this is China. And this was the Chinese growth model. Build, build and keep building.
But the building is done. They just don’t need any more apartments.
But there’s a lot of debt that needs to be unwound, and a lot of zombie companies wandering around.
It’s a mess.
Sure glad I don’t have to solve it.
JG.