EUR 850.00 For Business Accounts Only

Morningstar | New Morningstar Analyst Report for China Evergrande Group

As the Chinese property market enters a consolidation phase, large developers are expected to be the main beneficiary as smaller firms are pushed out of a market characterized by greater pricing pressure and tighter financing availability. Evergrande has done well over the last few years, achieving revenue and core profit growth of 28% and 16%, respectively, compounded annually from 2011 to 2016. It also greatly increased its land bank turnover in 2015 and 2016 after strong contract sales growth, catapulting the company into the top spot in the real estate developer league table. The company’s gearing also jumped, exceeding 100% in 2014 and peaking at 175% in 2016. The company also began to issue perpetual securities in 2013 as a way to manage its increasingly leveraged balance sheet. Including the perpetual securities, gearing reached over 500% in 2016. The debt-fueled growth coincided with a robust property market as the government enacted a series of supportive policies in late 2015, with the sector seeing strong sales throughout 2016. While the company achieved outstanding contracted sales in 2016 and 2017, it did not use the cash proceeds to deleverage. Instead, proceeds were allocated to toward land bank acquisitions, share buybacks, and equity investments in other businesses, including China Vanke, another leading Chinese real estate developer. The disposal of the stake in China Vanke and the introduction of strategic investors have created more available cash proceeds, which the company has used to pay down the perpetual bonds.In future, the change in demographics will lead to slower urbanization and lower fixed-asset investment. Further, the capital market will see tighter liquidity as the central government seeks to deleverage gradually. The buoyant property market and accommodating policy environment are mostly over. After accounting for the proceeds from strategic investors, combined with slower landbank acquisitions in 2018, the balance sheet is much stronger. But with the uncertainty of A-share listing and investment in new businesses, there is considerable risk for the company if the property market slows down.