October 27, 2021

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How Evergrande Created China's Most Valuable Auto Maker Without Selling a Single Car - 09/26/2021 - Market

How Evergrande Created China’s Most Valuable Auto Maker Without Selling a Single Car – 09/26/2021 – Market

NS Evergrande Group da ChinaToday’s developer on the verge of bankruptcy, made Many efforts over the years to branch out from her business beyond real estate, but what is even more impressive is how she has been able to manipulate the capital markets with the stories she has created.

One such story is Evergrande as a new energy vehicle manufacturer. The market value of China Evergrande New Energy Vehicle Group (Evergrande Auto), which has not yet sold a single car, was HK$674.1 billion (US$86.6 billion, about R$462 billion), making it not only the most valuable listed. A company in China, but also worth twice the value of its parent company, Evergrande – even though Evergrande has sold residential properties worth trillions of yuan in the past 20 years.

But times have changed. Evergrande Auto is currently worth 30 billion Hong Kong dollars (HK$), about 4% from its peak. On Tuesday (21), the company granted 323.72 million stock options worth 1.26 billion Hong Kong dollars (870 million Brazilian reais) to three directors and about 3,180 company employees, according to a document sent to the Hong Kong Stock Exchange.

The people who have benefited the most from Evergrande stories are Its founder, Hou Ka Yan, and your friends. For example, someone in Hue’s circle bought 80 million shares in Evergrande Health Industry Group — the predecessor of Evergrande Auto before it was renamed to serve its new purpose — for HK$0.3 per share, before selling them all for HK$50 a share, according to Caixin. news agency. The deal earned the investor more than 4 billion Hong Kong dollars.

Encouraged by this high success, Hui’s friend was also involved in the private placement of Evergrande Auto, but found that his luck had changed, according to Caixin. He continued to buy shares as the price fell, but eventually had to sell them at a loss.

Evergrande Auto’s main objective was to raise capital for the Evergrande Group. The parent company claimed to have invested 47.4 billion yuan (R$39.34 billion) in its auto business, but some analysts believe the bulk of that investment came from the market, not Evergrande itself.

“Evergrande Auto raised 30 billion yuan in two rounds. Which means that the company mostly used investors’ money – rather than its own capital – to invest, and was able to gain a high market value (for the car company) as a result, with (the car company) shares at a high price, it can Use them as collateral to raise more money.”

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When the Evergrande Auto story unfolded, the plot focused on mergers and acquisitions, not auto manufacturing. In September 2018, Evergrande bought a large stake in Xinjiang Guanghui Industry Investment Group for 14.5 billion yuan (12 billion RMB), making it the company’s second largest shareholder. This deal brought auto sales to the news because Guanghui Industry Investment is a shareholder in China Grand Automotive Services Group, one of the largest auto dealerships in the country. However, this narrative did not get anywhere. In 2019, cash-strapped Evergrande sold its stake in Guanghui Industry Investment to state-owned giant Shenergy Group for 14.85 billion yuan ($12,267).

In January 2019, Evergrande Health, the predecessor of Evergrande Auto, from the healthcare sector, acquired a 51% stake in National Electric Vehicle Sweden (Nevs) for US$930 million (R$4.969 billion). Hui, whose name is Mandarin Xu Jiayin, quickly closed the deal, perhaps because he needed to bolster the automaker’s credentials in Evergrande after his decision to collaborate with controversial entrepreneur Jia Yueting on the Faraday Future Electric Vehicle (FF) project failed. Without FF, Xu needed something to flesh out the Evergrande’s identity as a car maker, and the Nevs were absolutely right. I passed. After I purchased a share of Nevs, the price of Evergrande Health increased significantly.

The increase in these shares is partly due to the fact that they are concentrated in the hands of a relatively small number of shareholders. On August 9, 2020, the company received a warning from the Hong Kong Securities and Futures Commission regarding a high concentration of its ownership. The Authority’s conclusion indicated that on August 5, 2020, a group of 18 shareholders owned 19.83% of the shares issued by the company. Along with 74.99% of the shares issued by the company, this share represented 94.82% of the total shares of the company. Only 5.18% of the shares issued by Evergrande were owned by other shareholders of the company.

The agreement to acquire a majority stake in Fangchebao Group provides further evidence of Evergrande’s financial technologies. Acquired a 51% stake in more than 40,000 Fangchebao physical stores through stock exchange. Thus, Evergrande did not have to pay money for the deal, for which Fangchebao was tempted by promising the opportunity to make it public. As a result, Evergrande acquired valuable assets with an investment of nearly 1 billion yuan (R$826.1 million) to cover store renovation and system integration costs. At the end of 2020, Fangchebao’s total and net assets were 4.7 billion and 3.1 billion yuan, respectively (RMB 3.9 billion and R$2.57 billion).

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On March 29, 2021, Fangchebao brought in 17 strategic investors and raised a total of HK$16.35 billion (R$11.28 billion). These investors will have a 10% stake in the company upon completion of the transaction, bringing Fangchebao’s pre-financing valuation to HK$163.5 billion. This transaction will have a portion of the funds raised through the sale of existing shares, with the remainder raised by issuing new shares. Fangchebao issued 651 million new shares to investors, while Evergrande intends to sell 651 million existing shares to investors.

In this way, Evergrande was able to increase Fangchebao’s market capitalization to HK$163.5 billion (R$112.21 billion) in one year and pocket HK$8.175 billion (R$5.610 billion) by selling its shares in the company.

The question now is how did Evergrande manage to attract investors to Fangchebao’s business?

An institutional investor involved in the deal said the secret was Evergrande’s buyback promise. “What we appreciate is the valuation adjustment mechanism,” the investor said. “If Fangchebao does not go public within a year, Evergrande will buy back our shares at a premium of 15% over the prevailing market price. At least, through this mechanism, we can get our money back.”

The investor also noted that another company under the Evergrande umbrella, Evergrande Property Services Group, was able to go public very quickly, giving investors confidence that they had a potential exit from the business that wasn’t too far away.

Some other investors also believed that Evergrande could push up Fangchebao’s valuation, but they wanted the company to remain private. “Fangchebao, which sold cars and homes, was just a story. But we thought Evergrande wouldn’t have much trouble in a year (and could get a refund). That’s why we invested. A relatively low quality company, much worse than Evergrande Property Services. In Fangchebao’s case, it was It’s better not to bring it to the public. It will be more problematic after it is released to the public because its poor performance will be public knowledge, one investor said.

Many institutions bought Fangchebao shares because they thought Evergrande was “too big to failAt least not for another year.

“Last year, when Evergrande converted a strategic investment into common stock, the price of its bonds plummeted,” said one institutional investor. “At the time, we expected it wouldn’t go bankrupt, so we bought more and ended up making a lot of money. In comparison, a while ago, bond prices for China Fortune Land Development (another big real estate company) also went down significantly, but we didn’t buy anything because we felt That Ping An (a large shareholder in China Fortune Land) will not be saved.”

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The story of Evergrande is about growing with trends, or is it really about raising money to support your real estate unit full of debtHey, Evergrande Real Estate Group?

An industry veteran explained, “Essentially, Evergrande reduced the proportion of debt on its balance sheet in two areas: its auto subsidiary and Fangchebao. With the high valuation of these assets, it was able to raise a large sum.” “Evergrande’s ultimate intention was to acquire more land under the guise of making cars, and then use the land to make money.”

quoted crowded buffet: Only at low tide can you tell who was swimming naked. With house prices falling and the Three Red Lines policy implemented – which provides for a 70% cap on a contractor’s debt-to-asset ratio, a 100% cap on a net debt-to-equity ratio, and cash to cover short-term loans – staggering “financial technologies” are no longer a panacea. to Evergrande’s increasing operating costs. The former Chinese real estate giant is mired in debt.

Xu’s personal assets were also quietly changing. Recently, the mansion located on a hill where he lives in Hong Kong was transferred to a new owner.

Evergrande seemed to be generous with its investors. From 2011 to 2020, it was paying a dividend every year. The total amount disbursed exceeded 114.2 billion yuan (R$94.79 billion), while maintaining the dividend ratio at 50%, much higher than that of other Chinese real estate giants.

But to whom was this generous dividend paid? As of June 2021, Hui, his wife, Ding Yumei, and relatives own 76.7% of Evergrande’s 13.248 billion publicly traded shares. In other words, 53 billion yuan of the 69 billion that Evergrande has paid in dividends since it went public ended up in the pockets of Hui and his family.

Translated by Luis Roberto M. Gonsalves