The Evergrande Crisis Continues...

Alright guys, welcome back! It’s time for an update video on Evergrande. I told you it would be a crazy week, and it certainly was. However, Evergrande is still standing, at least for now. So let’s get up to speed on exactly where Evergrande is at with their bond payments and also where they’re likely heading across the next few months.

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So for those that have been living under a rock, Evergrande is China’s second largest property developer. It’s also the world’s most indebted property developer. Their problem at the moment is that they've got interest payments coming due on local and foreign bonds, and you guessed it, they can’t currently pay them.

It's kind of a rough story though because the Chinese government introduced these tough new laws last year, which essentially means that Evergrande has to—or Evergrande has to ditch a lot of its debt before they can take on more debt. This is actually what has run Evergrande into so much trouble. But unfortunately for them, they’re getting no apology from the Chinese government. The Chinese government has effectively said, you know, work it out yourself, we’re not coming to the rescue, which honestly is kind of a little bit brutal.

But anyway, here’s what’s happened since my last video. Evergrande had two big payments coming due on Thursday, and that was going to give us a much clearer idea of how close they were to bankruptcy. They had an interest payment of $83.5 million on a U.S. dollar denominated bond, and they had a $232 million payment due on a local bond. So these were both due on Thursday, and this is the information we currently have.

So on Thursday, Evergrande apparently did reach a deal with the local bondholders to get the $232 million yuan paid, which is worth about $36 million U.S. dollars. So good on them for that! However, unfortunately for the holders of the dollar denominated bond, as this article notes, "that day passed in total silence with no statements from Evergrande on how it planned to meet its obligations to its overseas bondholders."

They also note that the following morning, they can confirm that at least some of these bondholders had not been paid. However, you know, upon further investigation, this actually isn’t surprising as the bond’s covenants show that Evergrande has 30 days to find the money until it’s considered a default. So even if they did have the money, they probably wouldn’t have paid it because it’s actually smarter for their business to, for now, just kind of hold on to that money.

Because technically they’ve got another 30 days, and this tiny little clause could actually help them out a lot because it may now help them better manage their upcoming bond payments. Yes, unfortunately for Evergrande investors, it doesn’t stop there. They also have $45 million due on September the 29th and $149 million due on October the 11th across three different bonds.

So while the 30-day payment clause will let Evergrande kind of take a breath, it’s fair to say they’re definitely not out of the woods. You can definitely expect to continue to hear people talking about Evergrande across the next couple of months.

With that said, I now wanted to talk about—or kind of answer the question: what does Evergrande do from here? You know, what’s the play? What are they going to do? Well, it’s actually pretty straightforward. The equation is they essentially have to come up with more money without taking on more debt. Remember, they can’t take on more debt due to the Chinese government’s new rules.

So they’ve now got 30 days to pay this $83.5 million payment; that’s the ticking time bomb, as it’s being described. They also need to find $194 million across the next few weeks for their other payments coming due. So how do they raise this money? Well, remember, Evergrande is a property developer, so they've actually got quite a few properties on their books, which essentially they just now need to sell. They need to sell them very quickly to be able to realize some cash.

If we turned Evergrande’s balance sheet, they have $55 million U.S. dollars in inventory, $198 billion U.S. dollars of projects in development, and $22 billion U.S. dollars in completed properties held for sale. Now unfortunately for them, a lot of that money is in the projects in development section, and it’s obviously very hard to sell properties that aren’t actually finished.

But to make matters worse, they’re obviously facing a cash crunch right now, which means they’re struggling to pay suppliers and workers to actually get those projects to a sellable state. Bloomberg noted that Evergrande's vendors have suspended work on some projects due to unpaid bills, the company said in its earnings report. So with those properties unlikely to finish, it looks as though no money will be coming in from the projects in development tab.

So with that money kind of stuck there, then all the focus obviously turns to inventory and properties held for sale. Now that doesn’t look so bad, right? We’ve got $55 million in inventory and $22 billion U.S. dollars in properties held for sale. Well, unfortunately, there are a few factors to consider here.

First of all, a lot of the property held for sale is being used as collateral for their debts—about $1.3 billion U.S. dollars. Then another consideration—and this is something that I actually learned from Patrick Boyle—who brought it up in his video, very, very good coverage of the Evergrande crisis. So I would definitely recommend you check out his channel if you want to learn more about the crisis.

But he brought up the idea that there is a very real possibility that a lot of Evergrande's so-called properties held for sale are actually quite valueless, essentially being poor investments, which at face value seem to have cost a lot to build. So you know they must have at least that in value, but they actually don’t.

So the resale value of their inventory actually turns out to be much lower than what they state. It's kind of a case of, you know, building a $300 million apartment block in the middle of Antarctica. You know, you can say it’s a $300 million apartment block, but do you think you could actually sell it for $300 million dollars? Probably not.

So in their reporting, Evergrande states that the inventory numbers are either the lower of cost or their realizable value. Now considering realizable value is a figure that Evergrande’s accountants get to make up, essentially what they think they could sell it for, it’s probably likely that a lot of their inventory’s value is simply what it cost them to build.

And this is the problem because in a cash crunch, the chances are to sell quickly you aren’t going to be able to sell these apartments for full price. You're going to have to take an L, and you’ll probably have to sell it for less than what it cost you to build, in Evergrande’s case.

So long story short, the theory is that Evergrande's quoted inventory and properties held for sale is actually worth much less than what's quoted on their balance sheet. And that turns out—that theory turns out to be very consistent with reports coming out of China. Evergrande is currently selling at steep discounts to come up with some of that cash.

Bloomberg notes that China Evergrande Group's aggressive discounts failed to boost property sales in August, underscoring how the debt-laden developer's efforts to raise cash are squeezing profitability, also hinting that maybe a lot of these assets are actually quite valueless. The company's average selling price slid 11.5% in August from a month earlier to the lowest since July 2016, according to Bloomberg calculations based on a filing from a few Fridays ago.

Bloomberg also notes that despite selling stakes in some of its prized assets and offering steep discounts to offload apartments, Evergrande reported a 29% slide in profit for the first half. So obviously not a great outcome for Evergrande. Then CNBC also noted in a separate article that embattled developer China Evergrande said its property sales will likely continue to drop significantly in September, resulting in a further deterioration of its cash positions.

So yeah, not only is Evergrande running into a whole lot of due interest payments, their aggressive markdowns also aren’t really working. And to add salt to the wounds, they haven’t got any money to pay suppliers and workers, so a lot of their development projects just aren’t being completed, meaning there’s nothing else that’s really coming that they could sell for any decent amount of money.

There are even rumors going around at the moment that, you know, Evergrande might have actually exhausted what they have to sell and might pretty much already be finished. This article from CNBC notes the Chinese property giant said in a filing with the Hong Kong Stock Exchange it expects a significant continued decline in sales this month. I mean that potentially might be giving us a little hint there.

So I mean, that’s kind of where we sit with Evergrande. I wish I could sit here and tell you exactly where they’re heading from here, but unfortunately, I got to be honest, this is just not my area of expertise. Plus, we’ve also got the added complexity of lack of communication from the company and lack of transparency in some instances, which obviously makes things a lot harder.

However, my best guess is that, you know, it certainly seems like an uphill battle for them to stay afloat, particularly still with—I've still got so many more payments coming due before the year is out. So honestly, I wouldn’t be surprised if Evergrande kicks the bucket, and it seems like the Chinese government’s definitely not coming to save them. But again, as I say, I’m no expert.

But I would love to hear from you guys. Let me know what your opinion is of the whole situation. Do you think this is all over, red rover? Do you think they’re going to make it through somehow? Do you think that the Chinese government will change their tune and give them a bit of a bailout? Let me know in the comment section below. I’d be really interested to hear what you say.

But overall, guys, that will do us. Leave a like on the video if you did enjoy it. I really appreciate it! Thank you very much for leaving a like; it’s the easiest way to support the channel, and it really does help out! So I really appreciate it. Subscribe to the channel if you want to see more videos and stay up to date with the Evergrande crisis here on the channel.

Definitely check out Patrick’s channel as well, the one I was talking about before. I’ll leave that linked somewhere, probably linked in the description. So definitely check out his channel, very, very top quality videos on the crisis, which has helped me out a lot, helped me really understand it more as well.

So, but apart from that, guys, if you’re interested in how I go about my investing, you can check out Profitful. Links are down in the description below. But that will just about do it. Anything else to plug? New Money Clips channel—if you’re interested in shorter form new money content, you can head over there for even more. But that will do us for today, guys!

Thanks very much for watching! I’ll see you guys in the next video.

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