Collapse of China Evergrande Group?

 



The Analysis

Purpose-

To Analyse the current scenario as well as continue loosening financial statements of China’s one of the biggest companies- Evergrande Group.

 

Scope-

The data of this analysis was taken from verified news sources and from the last 2 Half-yearly reports. The scope focuses on the Financial ratio, growth ratio, Income statement, and cash flow statement.



Overview

 

Evergrande is China’s second-largest property developer based in Guangzhou, the capital of the Guangdong region in the south of the country. Riding the wave of China’s property boom, Evergrande expanded to 280 cities and became the light of the country’s real estate sector, having more than 1,300 real estate projects. Based on the financial statements, the company’s Quarterly Operating Income for 30th June 2021 is 1,152 Million Hong Kong dollars, which is -96.08% from the previous Quarterly Operating Income. As of now, the company is under financial stress to pay critical payments towards their bonds.

 

China Evergrande Group, accumulated $300 billion of total liabilities equals 2% of China's GDP, as it acquired assets and expanded over the years. However, property deals have been decreasing for months and the company stated recently that they will possibly extend to fall, forcing its cash flow further.

 

“Whether Evergrande can make payments, and if not, whether the authorities will bail it out – those are the immediate questions,” Masahiro Ichikawa, chief strategist at Sumitomo Mitsui DS Asset Management, told Reuters. “In the longer term, we could see slower Chinese growth hurting surrounding countries.”

 

Some of the firms with holdings in Evergrande bonds are Ashmore Group, BlackRock, HSBC Holdings, and UBS Group.

 

Debts & Interest payments-

According to data provider Refinitiv- interest payments totaling more than $100 million are due later this week on two of the company's bonds.

 

As per a Reuters report, Evergrande is due to pay interest of $83.5 million on bonds on September 23, with a grace period of 30 days. This will be a “major test” of whether the company will pay or the authorities will decide on a bailout plan.

 

In addition to bondholders, the company owes 667 billion yuan ($103 billion) to construction companies and other business creditors. Banks halted lending upon the estate developer following its cash flow lagged and rating companies downgraded the company, indicating liquidity concerns.

 

Indian Markets-

As of 21st September 2021, the Indian Market (Nifty 50) recovered and closed positively (+0.95%) after making a low of 17,326.10.

 

Siddhartha Khemka, head - retail research, at Motilal Oswal Financial Services, noted that weakness in the global markets and Asian equities have made investors cautious as they await the outcome of the US Federal Reserve and European Central Bank meetings this week.


 

Income Statement

 

Description

31st Dec 2020

30th June 2021

Sales

276,597

269,439

Total Expenses

247,242

268,287

Operating Income

29,355

1,152

Operating Income Growth

-23.60%

-96.08%

Operating Income Margin

-

13.35%

 

  

Cash Flow Statement

 

Description

31-Dec-2020

30-Jun-2020

Funds from Operations

(33,672)

6,357

Capital Expenditures

(12,520)

(5,657)

Net Financing Cash Flow

(96,033)

20,989

Net Investing Cash Flow

(8,084)

(38,047)

 

 

Financial Ratios

Ratio

2018

2019

2020

Return on equity %

2.08

0.85

0.35

Return on assets %

30.60

12.45

5.38

Return on invested capital %

7.70

3.26

1.42

Net margin %

7.98

3.60

1.58

Debt to asset ratio %

0.36

0.37

0.31

Debt to equity ratio %

2.18

2.25

2.06

 


Growth Ratios

 

Ratios

Growth

Revenue Growth (Quarterly YoY)

-16.48%

Revenue Growth Rate (5Y)

30.67%

EPS Growth (Quarterly YoY)

119.43%

EPS Growth Rate (5Y)

-3.09%

Dividend Growth Rate (3Y)

-47.72%

Capital Spending Growth Rate 5 Year

-2.83%

EBITDA CAGR (5Y)

30.75%

Total Debt CAGR (5Y)

19.37%

Net Profit Margin Growth Rate (5Y)

-13.82%

 


Technical Indicator’s

 

Indicator

Value

Signal

ADX(14)

90.704

Oversold

RSI(14)

25.955

Bearish

Williams %R

-95.687

Oversold

MACD(12,26)

-7.260

Bearish

STOCH(9,6)

22.343

Bearish

Analysis- All the Indicators are showing strong bearish signals and on the chart also the price is about to touch its all-time low.

 

  

Conclusion and Recommendations

 

Based on the above financial statement and price indicators, Company is in a very critical condition. They have to refinance the company as soon as possible and if the government did not come forward for assurance of bond payments then it can lead to further negative sentiments in the markets. The company performance is negative from 2019 is visible in financial ratios. Reducing high-interest rate debts is very important for the company with the help of refinancing as the company is generating lots of cash from Non-operating activities, this Non-operating cash cannot continue in the future but they must use it to pay high rate debt first so that companies survival became possible.


Thank you

Sahil Saini


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