Caixin
Aug 27, 2021 06:26 AM
BUSINESS

Evergrande Warns of 40% First-Half Profit Plunge

Evergrande has been frantically selling properties at a discount.
Evergrande has been frantically selling properties at a discount.

Debt-ridden China Evergrande Group warned of a first-half profit plunge of nearly 40% as the property giant struggles to meet the government’s three red lines policy on borrowings.

Evergrande expects to report a first-half net profit of 9 billion yuan to 10.5 billion yuan ($1.39 million to $1.62 billion), down 29% to 39% from the year-earlier earnings of 14.76 billion yuan, the company said late Wednesday.

It was the company’s fourth profit warning since mid-2019. Evergrande’s net profit hit a record of 72.2 billion yuan in 2018, with core real estate business profit of 78.3 billion yuan that year. In the following two years, net earnings and core business profits plunged.

For the first half of 2021, Evergrande also said it expects to report a loss in its core property business for the first time of 4 billion yuan. The profit decline in the first half was mainly due to a drop in real estate sales prices and an increase in expenses, Evergrande said. The new-energy vehicle unit lost 4.8 billion yuan.

The developer said its first-half net profit mainly reflected an 18.5 billion yuan gain from the sale of some shares and marked-to-market holding in internet unit Hengten Networks.

The real estate industry usually sells housing through advance sales. Developers collect pre-sale payments, which are recorded as operating revenue after the houses are delivered. The average turnover cycle for Evergrande’s projects is 1–1.5 years, indicating that the first-half earnings mainly reflected projects sold from the end of 2019 to the first half of 2021, a person close to Evergrande told Caixin.

Evergrande has been frantically selling properties at discounts this year. In late May, it offered certain homebuyers 30% to 40% off if they paid entirely in cash, company staffers told Caixin.

In the first half, the company reported 356 billion yuan of home sales, slightly higher than 349 billion yuan for the same period last year, holding onto its No. 2 spot among top developers in terms of sales area, according to the China Index Academy.

But average selling prices in the first six months declined 8.14% from a year ago to 8,294.70 yuan per square meter. In June, the average selling price dropped to 7,801.98 yuan from 8,865.16 yuan in January.

After years of expansion based on high leverage, Evergrande faces enormous capital pressure and severe debt repayment burdens. As of the end of 2020, Evergrande’s interest-bearing debt totaled 716.5 billion yuan, of which short-term debt due within two years amounted to 502.1 billion yuan.

Excluding presale payments, its assets-to-liabilities ratio was 83.43%, its net debt-to-equity ratio 152.88%, and the cash-to-short-debt ratio 0.47 times. All three breached the government’s "three red lines" requirements on debt, which mandate an assets-to-liabilities ratio of no more than 70%, a net debt-to-equity ratio of less than 100% and cash holdings at least equal to short-term debt.

Evergrande said June 30 it cut interest-bearing debt to 570 billion yuan and declared that its net debt-to-equity ratio dropped to less than 100%.

But a large amount of overdue payments on commercial notes is further challenging Evergrande’s tight cash flow. Since December 2020, Evergrande has been delaying repayment of commercial notes in Guangdong, a note holder told Caixin. Starting at the end of July, the company proposed to note holders to use properties to repay debt, several note holders told Caixin.

Evergrande has been scrambling to raise funds to pay its many lenders. It has been trying to sell stakes in its electric-vehicle and property services units. It is also in talks with several companies to sell its Hong Kong headquarters and a building in Guangzhou, sources told Caixin.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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