China Evergrande Group (3333 HK) – Overhang and uncertainties to persist
• Stock has been halted from trading since 21 Mar 2022
• Awaiting publication of audited FY21 results which has been delayed
• Restructuring process likely to be long drawn
Stock has been halted from trading since 21 Mar 2022 – China Evergrande’s stock has been halted from trading on the Hong Kong Stock Exchange since 21 Mar 2022 along with its two listed subsidiaries Evergrande Property Services (6666 HK) and Evergrande New Energy Vehicle (708 HK). This is because Evergrande was not able to publish its audited FY21 results on or before 31 Mar 2022 in accordance with the listing rules. This was in turn due to its auditor adding a larger number of additional audit procedures, and the problem was exacerbated by the Covid-19 outbreak. Evergrande said that it will publish its audited annual results as agreed with its auditors as soon as practicable after the audit procedures have been completed. Until then, the suspension in its shares will remain in force. Separately, Evergrande also
announced on 21 Mar 2022 that Evergrande Property Services had discovered that its deposits of ~RMB13.4b as security for third party pledge guarantees had been enforced by the relevant banks. Evergrande has since established an independent investigation committee and appointed a professional advisor to look into the matter.
Aiming to formulate a preliminary restructuring proposal by end of Jul 2022 – In a management briefing following the trading halt, Evergrande’s management highlighted that it would look to overcome its mounting liquidity issues and resume normal operations, while ~1,700 suppliers/construction companies (~70% of total) has agreed to continue working with it. Furthermore, Evergrande said that it remains committed to formulate a preliminary restructuring proposal by the end of Jul 2022.
Construction has apparently resumed at 95% of projects, but liquidity concerns remain – According
to a Reuters article quoting the official WeChat of Evergrande’s Pearl River Delta business unit, construction work has resumed at 95% of its projects across China as of late Mar 2022 (link). 734 developments have seen work resumed, including 424 projects back to normal construction levels. The
post also said that Evergrande will “continue to maintain the normal construction of the projects in
order to deliver the buildings to the owners with guaranteed quality and quantity at all costs”. While
this can be viewed as a positive development, we believe it remains to be seen if Evergrande can deliver on its promises, given that its liquidity position is likely to remain challenged and under continued stress until it can make significant asset divestments to raise cash. Its restructuring process will also likely be a very long one, and the recent negative development at Evergrande Property Services as highlighted earlier would make it even tougher for Evergrande to sell its stake in the entity, in our view. We relook at our assumptions, factoring in the asset divestments of China Ruyi (formerly HengTen Networks) and Shengjing Bank, and applying a larger discount assumption on Evergrande Property Services in our model. Our fair value estimate is lowered to HKD1.05 (previously HKD1.65). We remain highly bearish on
Evergrande’s prospects and see no easy way out for its equity shareholders.
ESG Updates
Evergrande has an ESG rating, which is the lowest rating in scoring matrix. Evergrande’s rating has
been in place at least since Dec 2016. According to ESG Research, although Evergrande has made
slight improvements to its quality assurance mechanisms, it still trails peers in the implementation of comprehensive programmes to capitalise on green building opportunities and managing risks typically faced by real estate developers. In 2019, only 5% of Evergrande’s projects were green-certified. It also lags leading peers on managing safety risks in property development operations, such as on contractor
oversight and implementation of injury reduction targets. Research also highlighted that it did not
find evidence of a group wide anti-corruption policy, whistle-blower system, or external auditing
mechanisms for Evergrande. SELL. (Research Team)