The largest real estate developer in China\u2014and one of the largest in the world\u2014is on the brink of bankruptcy. The problems this could create in the Chinese financial sector, and in turn in other parts of the world, are convulsing capital markets around the globe. The news is not encouraging: Evergrande has already defaulted on several interest coupons on its dollar debt, and recently the listing of its shares was suspended on the Hong Kong Stock Exchange.<\/p>\n
In a previous article, we analyzed the health of the Chinese real estate sector in general and concluded that it is in a bubble<\/a>.\u00a0 This article analyzes the financial health of Evergrande in particular, how the company has gotten to this point, and whether it will go bankrupt.<\/p>\n Evergrande became the largest Chinese real estate developer through turnover. It currently is engaged in about eight hundred active real estate developments in 230 mainly secondary and tertiary[1]<\/sup><\/a> Chinese cities. It is a giant company that, for some years, has been extending its business model to other economic activities. However, more than 97 percent of its income derives from real estate development, so the other activities (for example, constructing football stadiums, developing electric cars) are unimportant.<\/p>\n Evergrande reached its peak valuation at the end of 2017. At the time, it was worth almost $51 billion, ranking it among the 350 largest companies in the world and among the 40 largest companies in China. Since then, its value has been sinking, and today it is worth just $5 billion (90 percent of its value has vanished in four years). At today’s valuation, it is only the 2,650th-largest company in the world.<\/p>\n Why has Evergrande\u2019s value dropped so much? Is this a sign of an inevitable bankruptcy? \u00a0And what is the state of Evergrande\u2019s finances? Let us begin with an analysis of its income and profitability.<\/p>\n Evergrande was already the largest Chinese real estate developer in 2011. Since then, the company\u2019s sales have soared, particularly since 2016.<\/p>\nWhat Is Evergrande?<\/h2>\n
The Business Model: Is Evergrande Making Money?<\/h2>\n