On 27 May, market sources reported that regulators
are examining the funding transactions between China Evergrande and Shengjing
Bank that total over 100 billion RMB. Evergrande’s bonds faced an intense
selloff as investors’ concerns were aggravated.
After that, several negative rumours emerged, further pressuring Evergrande’s USD bonds. The 2022 to 2024 bond prices traded down 5% to 10% during the last week, which is the largest drop since February (when it was triggered by China Fortune Land’s credit event). Currently the March 2022 and June 2023 bonds are trading at a yield of 15% and 17% respectively.
Following this, we have summarized all the rumours causing the price drop, and would like to provide some quick commentary: (1) Transactions with Shengjing Bank that are under investigation, (2) Limit on land buying, (3) Unpaid commercial papers, (4) Huge sales discount and (5) Difficulties with refinancing.
(1) Transactions with Shengjing Bank that are under investigation
The original rumour only stated that the regulator is examining the transactions between Shengjing Bank and China Evergrande, with no updates at all afterwards. Given the lack of information, it is hard to comment about it. However, it is likely that the outcome will be a monetary fine instead of other worse scenarios.
(2) Limit on land buying
We think it is more likely that Evergrande has a low willingness to engage instead of the government disallowing the group to buy land. As expected profit margins have been very slim for projects sold in the 22-cities’ land auctions in the last two months, Evergrande may not be able to reap any marginal profit given its high borrowing cost.
(3) Unpaid commercial papers
Currently only a few images of expired commercial papers are circulating outside. However, the validity of these commercial papers are unknown, and it appears that these papers are only worth around 100 to 200k RMB each, which should be negligible. Nonetheless, it is a fact that Evergrande has been using more and more operating leverage (adding 80 billion RMB to trade payables to third parties in 2020), and we think it is a warning signal.
(4) Huge sales discount
This is not news, and we believe that those very low-priced sales are just some remaining unsold flats. A few outliers are sometimes negatively exaggerated by rumours. Besides, we think it is not surprising to hear that Evergrande requires full payment from buyers to enjoy bigger discount promotion, and this should not be over-interpreted.
(5) Difficulties with refinancing
This is not news either, but a recent spike in yield should affect its refinancing ability. Still, we think Evergrande can maintain short-term cash flows through sales and equity financing - this part has not changed much since our last update in April.
Evergrande’s sales in January to May this year is on track at +4.5% YoY (Target: +3.7%). The Group also sold a small portion of its holdings in Evergrande New Energy Vehicle (current market cap at 349 billion HKD) two weeks ago to acquire 10.6 billion HKD, demonstrating its strong equity financing ability. Therefore, we do not think there are material changes to Evergrande’s fundamentals.
We will maintain our views toward its short-term bonds at this point, and we think the bonds are now more attractive to high-yield seekers.
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