Evergrande shopping spree to continue even as debt soars

China Evergrande Group’s debt-fuelled expansion spree shows no signs of slowing down. Even as soaring interest payments and marketing costs ate into first-half profit, a top executive at the Chinese developer said on Aug 30 that the company wants to acquire brokerage and trust companies as well as smaller rivals — deals that would add to about US$6 billion ($8.19 billion) of purchases since the start of 2016. Evergrande, which made a surprise entry in August into the bidding war for the country’s largest homebuilder, China Vanke, also signalled it may invest in other listed companies.
Billionaire chairman Hui Ka Yan’s strategy of debt-funded deal-making has befuddled analysts and left Evergrande with a credit rating that is among the lowest of large Chinese developers. Moody’s Investor’s Service, which in January cut the company’s notes to a “high risk” rank of B3, in July reiterated its negative outlook, citing high leverage.
The earnings report on Aug 30 may do little to allay concerns about its balance sheet, with debt soaring 28% to RMB381.3 billion ($77.87 billion) in the first half and interest payments tripling. The developer says it will also work on expanding its landbank in the second half to meet sales targets, and pursue “cost-effective” ways to add to projects, such as mergers and acquisitions.
Aggressive approach
“Growth wouldn’t have been as high had Evergrande not been aggressive in the last two years,” CEO Xia Haijun told reporters in Hong Kong on Aug 30, referring to the company’s purchases of sites for its landbank. “We would have missed out.”
Evergrande shares slumped 6.9% to HK$5.36 in Hong Kong trading on Aug 31, the most since June 20. The stock has declined 21% this year, compared with an 11% increase in the Hang Seng Properties Index.
The Guangzhou-based developer’s core profit, or profit excluding property revaluations and foreign-exchange losses, fell 23% to RMB7.8 billion in the first half, from RMB10.2 billion a year earlier, according to a statement to the Hong Kong stock exchange on Aug 30. Marketing costs jumped more than 51% as the company said it embarked on nationwide “brand publicity activities”.
The higher costs were offset by surging property sales, with contracted sales jumping 63% to RMB141.8 billion. The developer has pledged to exceed its RMB300 billion target for pre-sales contracts this year, a goal that is the highest among mainland builders amid a turnaround in China’s housing...