Evergrande’s $305 billion liabilities is equivalent to 2% of China’s gross domestic product. Although Beijing continues to say little on the crisis, speculation is already rife that a bail out is not likely to happen. Local governments have been asked to stand by for Evergrande’s collapse, eventually resulting in suppliers and investors demanding their money back in ugly protests outside the company’s headquarters.
The National Day holidays provided a respite from the tensions after its failure to pay $180 million worth of interests to investors. Right after the long weekend, Evergrande set the market abuzz when it halted trading of its shares and structured products on the Hong Kong stock exchange without any explanation. However, trading of its electrical vehicle (EV) unit’s shares were not affected although prices dropped 6%.
It was later revealed that the reason behind the suspension of trading was due to Evergrande’s sale of half its stake in its property management unit to Hopson Development. This latest development came after both parties requested a halt in trading activities prior to the major transaction.
Hopson Development will own a 51% stake valued at HK$40 billion ($5.1 billion) in Evergrande’s property unit. This move offers a glimmer of a lifeline for Evergrande, analyst Aaron Pang Dao Chang said. Hopson fares better than most property developers with healthy profits in the first half of the year, boasts of dividend payouts and safely has more assets than liabilities to its name. Hopson’s shares, valued at HK$60.4 billion ($7.8 billion) has leaped 40% year-to-date.
Apart from this new injection of funds, Aaron Pang Dao Chang saw other signs of a better outlook. Evergrande’s effort in generating more cash quickly through its disposal of assets is an indication that the company is still trying to weather the storm. Also, China has been nudging property developers owned by the government or state to purchase Evergrande’s assets. China’s central bank has also stepped in to offer homebuyers assurance of their investments.
Aaron Pang Dao Chang noted that that the general public remained apprehensive, understandably so until an actual payout is received. The sale of shares to Hopson does raise concerns on China’s property sector and the wider economy if Evergrande starts to be liquidated at low prices. With another payment deadline upcoming in November, industry watchers and investors alike will be focusing on Evergrande’s capability of fulfilling the $162 million dollar bond coupon payments.