The second-largest Property developer in China- Evergrande Real Estate Group – saw its shares slump by almost 90 percent since July last year, owing to the Chinese government’s increasing attempts to tame down the country’s real estate market by cracking down on speculation. Debt woes worsened for the company but it is unlikely to have the same fallout as observed in the downfall of U.S. investment bank Lehman Brothers in 2008, analysts believe.
On 20 September, Monday, the financial crunch at Chinese Evergrande sent shocks to stock markets in Asia, Europe and the US. On the Hong Kong Stock Exchange, it touched its weakest level since May 2010, losing 10.4 percent apiece marking a close at 2.28 HKD. In the previous year during the same period, the stock was trading at around 16 HKD.
The S&P 500 plummeted 1.7 per cent, the worst trading day for investors since May. It nosedived as much as 2.9 per cent in the early trading hours Monday but recuperated in late afternoon trading. At one point, Dow Jones slipped more than 800 points. The entire market observed a sharp selling, with only 50 stocks in the benchmark index managing to close off the day in the green. The hardest hit were the energy stocks, followed by the technology-heavy Nasdaq Composite fell 2.2 per cent.
Investors feared a possible real estate sector breakdown which triggered a sharp sell-off, bringing the Hang Seng Property index down by nearly 7 per cent to its lowest point since 2016. The Hang Seng index in Hong Kong ended at 24,099 points, its lowest level since October of last year.
Evergrande, China’s largest real estate developer, has been jolted with its shares free-fall which is jeopardizing the investors’ trust in the company.
Last year, the property developer firm brought in $77 billion in revenue, but that could not supersede the two repayments due in the coming weeks. The company is head over heels in debts. Firstly, an $83 million interest payment is due today, i.e. Thursday, according to Reuters, and secondly, repayment time for another debt of $47.5 million for a different bond is approaching, which is due on Sept. 29. Though, the company’s chairman had reassured its investors, in an internal meeting on late Wednesday, that his key priority will be to help wealthy investors redeem their products. In this regard, they have resolved a coupon payment with creditors, but this is just a facet of its mountain of debt worth $305 billion.
On Sept. 14, the beleaguered firm informed its investors that the company is in a tight position to fulfill the debt obligations. It said the company cannot sell properties and other assets quickly to pay off its massive $300bn debts, and that its cash flow was under “tremendous pressure”.
In a statement to Hong Kong Stock Exchange, it said “The month of September is typically when real estate companies in China record higher contract sales of properties…” “The Company expects a significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cash flow and liquidity.”
Evergrande not just owns a business in real estate, but in other sectors too, including an electric vehicle company, a soccer team and a bottled water business among others. Even the selling-off of related assets of these investments could not save them from falling into the spiral of debts.
In a statement to employees, company chairman Hui Ka Yuan reportedly said: “I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible and achieve the pivotal target of delivering the property projects as pledged.”
Evergrande’s diversified interest includes catering to tourists through Evergrande Fairyland, its theme park division. Its claim to fame is Ocean Flower Island, or Sea Flower Island, which is an artificial archipelago in Danzhou, Hainan, China. This ambitious project of Evergrande aimed at building an artificial island consisting of malls, museums, and amusement parks.
Somewhere, the diversified interests of the company are responsible for landing it into hot water, according to experts. The Evergrande group “strayed far from its core business, which is part of how it got into this mess,” said Mattie Bekink, China director of the Economist Intelligence Unit.
Goldman Sachs analysts believe that the company’s structure makes it “difficult to ascertain a more precise picture of [its] recovery.”
“The story of Evergrande is the story of the deep [and] structural challenges to China’s economy related to debt,” added Bekink.
Now, the company is grappling with the ballooning debts of over $300 billion that has wreaked havoc on its credit rating and share price. Additionally, the company has to cope up with almost 800 unfinished residential buildings, several unpaid suppliers and over a million home buyers who have made an investment in houses constructed by Evergrande.
Way Forward For The Company:
Evergrande said on Wednesday that it will make a bond interest payment on Sept. 23 following private discussions with bondholders, in an effort to gain the lost trust from the investors.
In addition, on the same day, the People’s Bank of China infused 90 billion yuan ($13.9 billion) into the banking system.
This resulted in optimism in the market for the day and the shares gained some favour from the investors on the bourses, but it keeps the flustered investors guessing about the fate of the second, payment due next week.
The group’s electric vehicle and property services units gained almost 3% and 9%, respectively.
To highlight the possible solution for the debt-ridden company, Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, wrote, “The company could restructure its debts but continue in operation, or it could liquidate.”
He added, in either case, investors in the company’s financial instruments may have to bear some losses.
“In the event of a liquidation, however, Chinese and global investors could decide that the contagion could spread beyond China,” he further said.
Evergrande Crisis & Global Wealth
The selloff on Monday quivered the key indices across the Asia-Pacific, Europe and the U.S. It wiped out the amassed $2.2 trillion of the market capitalization of world equities from a record high of $97 trillion registered on September 6, according to Refinitiv data.
Moreover, the richest 500 people lost a combined $135 billion, Bloomberg reported.
As per the Bloomberg Billionaires Index, Tesla Inc’s Elon Musk’s net worth dipped $7.2 billion to $198 billion on Monday. Whereas Jeff Bezos’s wealth was trimmed by $5.6 billion, resulting in $194.2 billion.
Evergrande founder and Chairman Hui Ka Yan’s fortune pared at $7.3 billion from a zenith of $42 billion in 2017.
Top 3 Stocks That Sustained The Market Blip
Monday’s setback is a big lesson for the investors, as ignorance is not always bliss. Fundamentals can’t be ignored, nor undervalued. Given below are some of the stocks that are recommended by Zacks.
1. Apple Inc.
Over the past 60 days, the Zacks Consensus Estimate for the company’s current-year earnings has moved up 7.7%. Besides, the earnings growth rate for the current year is 70.4%.
On the dashboard of Quantale, on September 20, the stock closed at $142.94, and since then, the stock has gained almost 2%. On September 22, the stock closed the intraday at $145.85.
In the last one year, the stock has given 36.16% returns on investment.
The Zacks Consensus Estimate for its current-year earnings ascended 27.8% over the past 2 months and the earnings growth rate for the current year is 395%.
Shares of Eagle Bulk Shipping tanked 13.6% on Sep 20, marking a close at $43.71 from the previous day close of $50.58. In the last two days, the stock has shown an improvement, and climbed up to $47.34, gaining almost 9%. In the last one year, the stock has given 191.32 % returns on investment.
3. J & J Snack Foods Corp.
J & J Snack Foods Corp.
On the dashboard of Quantale, the stock of the company closed at $152.39, plummeting almost 1% on Monday. On September 22, the stock marked an intraday close at $154.77, up almost 1.5% since Monday.
In the last one year, the stock has given 21.84% returns on investment.