If Evergrande Liquidates, What Next?

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News Analysis

The lingering China Evergrande Group crisis of more than two years may be reaching a tipping point, with the world’s most indebted property developer averting a potentially imminent liquidation with a last-minute adjournment of a court hearing to January 2024, allowing the company time to finalize a revamped debt restructuring proposal.

But even as a deadline eases, a restructuring appears unachievable from an accounting standpoint, while liquidation appears imminent, analysts say.

They also say that Evergrande has never made a profit and that its primary purpose became generating revenue to fund its growing balance sheet and keeping the Chinese Communist Party going.

“[Evergrande’s] problems have built up over a number of years, and the developer has been inflating revenue and profits for years, ” Nigel Stevenson, an analyst at Hong Kong-based GMT Research, told The Epoch Times. “Consequently, it has an accumulated loss of close to a trillion yuan. With its huge losses, liabilities exceeding its assets by a very wide margin, and the fact that its creditors will unlikely waive its liabilities, a restructuring is extremely difficult and looks almost impossible.

“Evergrande has [also] taken a huge write-down on a lot of assets, which suggests that the quality of the assets is a problem.”

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While the troubled real estate developer faced a deadline to present a “concrete” revised debt restructuring proposal for offshore creditors, the company was given more time, with the court hearing on its liquidation adjourned until Jan. 29, 2024, according to a statement it made on Dec. 4.

This extension was given without opposition from creditors, according to Evergrande, which has more than $300 billion in liabilities.

In an earlier adjournment on Oct. 29, the Hong Kong High Court had stated that the Dec. 4 hearing would be the last before a decision was made on whether to liquidate Evergrande in the absence of a “concrete” restructuring plan.

Evergrande defaulted on its offshore loan in late 2021, becoming the poster child for China’s property sector’s debt problem. According to Reuters, it hurried last week to amend its reorganization plan to avoid liquidation.

Fundamental Problems

Nevertheless, according to Mr. Stevenson and his analyst colleagues at GMT Research, contrary to popular belief, Evergrande wasn’t a victim of tighter liquidity or a COVID-19-induced property market decline; its problems were considerably more basic:

“There were never any profits.”

In a note accessed by The Epoch Times, the GMT analysts stated that Evergrande made substantial adjustments to how it recognized revenue from property sales in 2021. The company shifted to a method that recognized revenue for the prepaid, unfinished, and undelivered properties as well, from booking revenues when customers obtained the physical possession or the legal title of the completed properties.

This change, as a fair accounting practice, should have been implemented retrospectively with previous period financials restated, allowing for the impact over time. However, Evergrande said that it was unable to do so due to the enormous number of employees who had left the company. As a result, the company adopted these changes beginning in 2021, tweaking the year’s finances.

“The change to revenue recognition had a substantial impact on Evergrande’s financials. It resulted in the reversal of previously recorded revenue of 664 billion yuan and net profits of 102 billion yuan,” the analysts wrote.

In addition to the losses, Evergrande also had to write down assets worth 126 billion yuan in 2022 and 39 billion yuan in the first half of 2023, which, including the effect of the change in revenue recognition, recorded total accumulated losses of “a staggering 954 billion yuan.”

Criticizing the overstated revenues, the note also said that, over time, Evergrande’s main goal shifted to obtaining funds to support its balance sheet and to “keep the party going.”

The property business, the note added, may never have been profitable if accounted for correctly, even as Evergrande found extraordinary ways to raise capital, such as by branching into businesses such as insurance, bottled water, health care, electric vehicles; and raising 130 billion yuan from strategic investors by promising an onshore listing.

Borrowing ever-increasing sums is the only way that Evergrande can remain solvent, the analysts noted, even as funding mechanisms have already dried up.

Hence, in the backdrop of a high possibility of Evergrande’s creditors eventually turning off the taps, “liquidation seems imminent,” Mr. Stevenson said.

In a filing to the Hong Kong stock exchange on Dec. 4, though, Evergrande claimed that GMT’s allegation that the company has never been profitable is “without basis” and that it would offer a clarification in due course.

Uncharted Territory

Still, given that “Evergrande is an extremely complex situation with its problems treading an uncharted territory, the future of this property developer looks bleak,” Mr. Stevenson said.

Moreover, according to Barclays, 1.6 million homeowners haven’t received their homes, worth billions of dollars, that they have already paid for. If the company declares bankruptcy, they will be the biggest losers—and the regime in Beijing will likely face the risk of civil unrest.

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