Collateral Damage of Evergrande's Debt Implosion



· 5月1日

In a thriving industry, companies tend to prosper together. But when things have gone wrong, they sink with the ship altogether. Companies on the supply chain of China's real estate developer Evergrande are dragged down as the giant's woes spiral.

Credit: China Visual GroupEmbatteld real estate developer Evergrande has caused massive collateral damage to many suppliers.

BEIJING, April 30 (TMTPOST) -In the earnings season, the A-share listed companies that are complicated by Evergrande’s debt default are coming to light.

On April 28, Piarno (002853.SZ), Holike (603898.SH) and Artsgroup (603017.SH) disclosed their annual reports with substantial declines in their net profit or a huge loss, and the main contributing factor is the provisions for bad debts of Evergrande Group and its subsidiaries. Earlier, many suppliers of building materials and home furnishings and civil construction on Evergrande's supply chain had disclosed the negative impact of getting tangled with Evergrande in their performance forecasts or annual reports. Some of them are leading companies in niche markets, such as Robam (002508.SZ), Sfygroup (002572.SZ) and 3treesgroup (603737.SH).

The listed companies linked to Evergrande saw their results or share price fall. After an in-depth investigation, TMTPost found that on top of the negative impact of the developer, these companies were also affected by slow economic growth and their own problematic development strategy.

In the face of Evergrande's failure to pay debts since last August, most companies made a one-time full or high proportional provisions in order to pave the way for better results in 2022 and beyond. Industry insiders, however, told TMTPost that the negative impact of Evergrande cannot be brushed aside just by adding bad debt expenses, especially for those companies that have been "feeding" on Evergrande for a long time. Weaning themselves off Evergrande and finding a sustainable growth path is a long way to go.

How many have been trapped in Evergrande debt crisis?

Evergrande is a big conglomerate, and there are many companies on its supply chain, including building materials and home furnishing and civil construction suppliers. According to public information, the number of A-share listed companies heavily affected by the crisis have reached 28, of which 18 reported net losses, 10 reported sharp falls in net profits.

Jayugroup (300117.SZ), which primarily engages in windows, doors and curtain wall, reported 2021 operating income of RMB 1.430 billion, down by 31.23% year-on-year; Net profit attributed to shareholders was RMB 1.348 billion, plunging 1,767.77% year-on-year. And historical financial track records shows that the company has an accumulated profit of RMB 882 million in the past 15 years. In other words, the company has lost more than 15 years of its profits in just one year.

On last year's huge loss, Jayugroup said that it was mainly due to the provision for impairment of receivables and contract assets related to Evergrande Group. The company was involved in Evergrande's commercial acceptances exposure amounting to RMB1,316 million, accounts receivable, contract assets and inventories of approximately RMB574 million. The company disclosed in the annual report that the provision for bad debts by individual items, only to customer accounts receivable book balance of RMB 1.069 billion, the provision for bad debts of RMB 749 million is at 70% of total bad debts.

At the end of 2021, Piarno still had RMB564 million in receivables from Evergrande and its subsidiaries and associate companies. At the same time, in last August, Piarno also took over 40% of Evergrande's equity interest in Evergrande Piarno for a consideration of RMB79.2 million, in the name of "optimising the allocation of resources and improving the overall operational management efficiency of the company".

In 2021, the company reported a net profit loss of RMB 729 million (down by 470.05% YOY) despite a year-over-year increase of 22.10% in revenue (RMB 1.824 billion for 2021).

In addition to the big loss suffered by some suppliers, other Evergrande-linked enterprises ran into trouble. For example, Robam, which was listed in 2010, suffered its first earnings decline since its listing because of the full provision for bad debts of Evergrande of RMB 660 million in 2021. In 2021, Robam's net profit attributable to the shareholders was RMB 1.332 billion, down by 19.81% YOY. That is, Evergrande's bad debts were almost equivalent to half of Robam 's earnings last year.

Sfygroup also suffered a sharp decline of 89.72% in last year's net profit attributable to the shareholders due to the provision of RMB 909 million for the receivables from Evergrande Group.

On April 28, 26 of the 28 companies mentioned above saw their shares fall at close compared with last August. Among them, 8 companies including World Union Bank, Jayugroup, 3treesgroup fell by more than 40%.

"Big customer dependence" at high risk

"In the past few years, getting big customers such as Evergrande, Country Garden, and Vanke was the guarantee of income and profits, but with the slowdown in the growth of the entire real estate industry and the impact of the epidemic, all prosperity was reduced to ruins in minutes," A person in the building materials and home furnishing industry told the TMTPost. In the end, it was caused by the slowing growth of the overall real estate industry and the over-concentration of these corporate customers. In addition to Evergrande, many other large and small real estate developers are also experiencing debt crises one after another, and it is not ruled out that other companies will be affected.

A number of listed companies that had been affected by Evergrande blamed their poor results on the industry’s overall slump.

Transition is easier said than done

"As far as listed companies are concerned, they can only recognize when they step on a landmine. If the receivables cannot be recovered, provisions will be allocated in full or a large proportion at one time. After all, it takes time to repay debts with apartment units since litigation and other methods may not be effective, " said a industry insider. After the accrual, it is equivalent to getting rid of burdens, and it is still necessary for public companies.

In fact, after the implosion of Evergrande, many companies became cautious about the real estate business and construction projects. On the other hand, those with a small exposure to Evergrande's business are seeking transformation and minimizing the impact of Evergrande; but those who feed on Evergrande for a long time may not be able to turn around in the short term.

In 2021, Jangho Group has accrued about RMB 2.46 billion of various impairment losses to risky customers, including Evergrande. The company said that given large provisions made in 2021, the probability for high provisions in 2022 is low.

Gold Mantis also said in an interview with the media that it is already adjusting its business structure, striving to increase orders for public works, hoping to make up for the problems encountered in private real estate and residential projects. At the same time, they will continue to undertake relatively secure residential projects, but in general, they are cut residential business.

"Evergrande has recently been suspended from trading and reorganized, and we can only expect to collect the receivables after the reorganization," a staffer of Jiayu's securities department told the TMTPost with a resigned tone. With the seismic changes in the real estate industry, the company is planning to shift towards photovoltaic industry. However, due to the impact of the epidemic, contruction progress was slower than expected. The annual report shows that in 2021, the photovoltaic business segment of Jiayu will contribute RMB 264 million, accounting for 18.46% of total revenue and representing a year-on-year decrease of 43.10%.

Dinggu Group's response to the TMTPost was also not firm. "The situation of Evergrande is unclear now. It is a bit difficult to transfer the property with a house as a mortgage. We will continue to collect receivables. We can only see the follow-up situation."

Hu Zhongxin told the TMTPost that in terms of the transformation of a troubled enterprise, the first and foremost is the transformation of thinking, but under the current circumstances, it is indeed not easy to achieve a successful transformation. It suggests that building materials and home renovations companies should deploy a variety of channels, so that when a problem occurs in a certain channel, risks can be mitigated.

Hu also mentioned that the current real estate regulation and the impact of the epidemic have actually accelerated the consolidation of the building materials and home innovation industry, and the third- and fourth-tier brands have gradually decreased and concentrated on the top. From the perspective of the top 10 companies in the wood flooring industry in 2020, 9 of them are growing in performance. In his view, with the upgrading of consumption and the operation of branding, the concentration of the industry will further increase, and companies with good reputation, experience and capital are expected to further expand their market share.

(The Chinse verson of the article was written by Su Qitao and edited by Cui Wenguan.)

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