EUR 175.34 For Business Accounts Only

China Evergrande Group: The case of rising leverage and lower profit margins

Having paid dividends of RMB 27.7bn in 2018, noteholders must have been relieved when China Evergrande Group (“Evergrande” or the “Group”) did not recommend a final dividend for the year ended 31 December 2018. But they were unable to avert the cardiac arrest that was about to follow. After issuing USD 3.0bn of senior notes in January, Evergrande issued another USD 3.0bn in April.

The Chinese property market has been showing signs of decline, or at the very least, slowing growth, depending on where you get your data. This may have encouraged Evergrande to enter the electric vehicle (“EV”) arena in 2018. And on 16 March 2019, the Group boldly declared its ambition to be the world’s largest EV manufacturer in three to five years. Its first EV will be fully operational in June 2019 and is expected to be available worldwide.

Within the context of negative developments in the Chinese property market, along with Evergrande’s rising leverage, profit margin squeeze, and EV capex, we maintain our UNDERWEIGHT recommendation on the EVERRE complex. We note that Evergrande’s presence in China and its role to support the local economies of Chinese cities could prompt the Chinese government and state-owned banks to provide the Group with financial support, if necessary. As such, Evergrande’s bonds could be attractive for long-only retail investors. Nevertheless, we believe the bonds are not investable by asset managers.