- The debt outstandings increased slightly, though it doesn’t represent the real figure.
- Their account payables added another burden for survival.
- The escalated litigations are hidden bombs.
- The sooner to cut the loss, the lower the cost to the debtors and the whole economy.
Evergrande reported a result of the first half of 2023, making a loss, which was not a big surprise, as it filed Chapter 11 days earlier. I originally insisted they should go through a legal process to restructure their borrowings rather than delaying interest payments.
If the problem is caused by an unexpected one-time issue, that company might survive in the long run with short-term financial maneuvers, though this is not the case for systemic problems. The debt should be restructured sooner rather than later, which lowers total costs for the debtors and even for the whole economy.
We can actually confirm this point through their recent earnings report, which is uploaded at
Their debt outstandings were about 625bn RMB, about 2% increase from the last year end of 612bn RMB, which we can say more or less stable. Moreover, they had 607bn RMB in 2021, giving an impression that their problem was not worsened. However, the reality is gloomier than it appears.
Just in case, their 2021 result can be seen at https://doc.irasia.com/listco/hk/evergrande/annual/2021/car2021.pdf
The current liabilities don’t match to the current assets
The real problem was whether they could pay back those debts or not. The simple answer is no, which is why they filed Chapter 11. We can analyze the situation through their current assets and liabilities.
Considering their business model, the majority of the contract liabilities should be an advance payment linked to the construction in progress. When all the houses are not sold in advance, they become backlogs sold to the market later. Account payables are mostly liabilities to construct those properties, some of which are financed by debts.
In this sense, those current assets and liabilities should be matched or, those assets are monetized to pay those liabilities in the long run. However, as we can see, there is a large margin between those, implying it is impossible to pay back all the liabilities, which is why they filed Chapter 11.
Their debt outstandings have not been substantially changed for this period, as said, but they did not file the bankruptcy at the time of default. We can see one of the reasons from those tables, which is a decrease in the amount of contract liabilities.
It was 974bn at the end of 2021, declining to 604bn in the first half of 2023. On the other hand, their construction in progress was reduced to 1,085 from 1,263 at the same period. It means some of the property owners did realize their advance payment as their properties completed, which also means that the debt holders did not get anything from their recent business activities.
The real cost has increased as a matter of fact
We might say that the debt holders are sacrificed to save the retail owners, but I am not sure it is the right observation or not, as the nature of those retail investors is unknown. Moreover, looking at the current liabilities, it is also noted that account payables increased as well. We can say some of the contract liabilities were taken over by account payables, which are more likely payments for contractors to build those properties.
Those payables increased at 164bn RMB in one and half a year, which is not actually a small number, as it is more or less 23bn USD additional burden. They also have a fixed asset to cover the debt, though it is quite hard to see how they can make a plan for survival.
Adding to this, there is another issue, which is litigation. They reported 534bn RMB litigation at 1H 2023, compared to 115bn RMB in 2021. I am not sure about the nature of those litigation as well, but likely more related to account payables, rather than contract liabilities.
However, there is also another possibility that some of those litigations are not on balance, which might be additional liabilities to them. If they filed Chapter 11 earlier, those issues never happened.
It is absolutely true that the cost should be lower when cutting a loss earlier. However, we might mitigate some losses for special interests to delay the process, whose outcomes are less fairer than the market concludes.
FFF 