Four years after vying with Jack Ma for the title of Asia’s richest man, Evergrande chairman Hui Ka Yan’s fortune is plunging and his sprawling real estate empire is on the verge of collapse.
It’s a stunning reversal for a man who fought his way from poverty in rural China to build one of the world’s largest property companies. In previous times of trouble, Hui had been able to rely on the help of his tycoon friends and local government support. This time, with US$305 billion in liabilities and the company’s asset prices plunging, Hui appears more alone.
What happens to Hui is open to question, including whether he will retain ownership of his empire. One of his allies and fellow billionaire Zhang Jindong lost control of the retail arm of his Suning conglomerate when it received a state-backed bailout in July. Other heads of failed companies have met with worse fates, from arrest to execution.
Hui’s empire is turning into one of the biggest victims of President Xi Jinping’s efforts to curb the debt-fueled excesses of conglomerates and defuse risks in the nation’s housing market. Evergrande and its affiliated companies were built through an aggressive mix of dollar debt issuance, share sales, bank loans and shadow financing. The group now faces at the minimum a debt restructuring, which could be China’s largest ever.
Hui remains in charge of the group and was seen publicly at the Communist Party’s 100th anniversary celebration in Tiananmen Square in July. He met with employees in September, and signed a public statement emphasizing the importance of finishing construction of sold properties. Yet the lack of public support for Hui from Beijing and his tumbling fortune — down US$15 billion this year — is forcing him to intensify efforts to save his empire, such as selling stakes in some of Evergrande’s once-prized assets. This includes reportedly selling a majority holding in its property services unit to another developer controlled by the billionaire Chu family.
Hui has survived plenty of challenges in the past. He was born in Henan province in 1958. After losing his mother as an infant, he was raised by his grandmother and his father, who cut wood for a living. Education provided an escape from poverty. Hui graduated from Wuhan Institute of Science and Technology in 1982. After working at a steel company, he quit his job in 1992 to try his luck in real estate.
He founded Evergrande in 1996 in the southern city of Guangzhou, and over the next decades built the firm into a colossus that controlled land five times the size of Manhattan. Hui accrued interests in soccer and volleyball teams, bottled water, online entertainment, banking and insurance. He vowed to eclipse Elon Musk with the “most powerful new energy automobile company in the world.”
As the company grew, so did Hui’s wealth. His personal fortune swelled to US$42 billion at its peak in 2017. His majority holding in Evergrande meant he benefited generously from dividends — pocketing US$8 billion alone since 2011, according to Bloomberg calculations.
His companies bought luxurious mansions, including one in Sydney that had to be sold in 2015 after the Australian government found the purchase violated foreign investment rules. He was the only director of a company that owned a US$100 million house in the hills above Hong Kong island.
Hui made sure he aligned his business with areas that meshed with the priorities of China’s Communist Party leaders, particularly Xi. He’s a member of the Political Consultative Committee, which helps advise the government on policy. In 2018, he was included on an official list of 100 outstanding entrepreneurs. Yet there was increasing concern about the size of the company’s debts, which by 2018 had swelled to more than US$100 billion. That year, China’s central bank singled Evergrande out for having the potential to pose systemic risks to the financial system, along with HNA Group, Tomorrow Holding Co. and Fosun International Ltd. China’s era of conglomerates expanding through aggressive debt-fueled acquisitions was ending.
Hui, pledging to cut his dependency on leverage, turned — as he had often done in the past — to friends and corporate connections to raise money. But regulators kept tightening the screws. Shadow loans — non-bank financing that accounted for almost one-third of Evergrande’s debt in 2019 — dried up, opaque borrowing via joint ventures was scrutinized, and regulators prevented fresh borrowing with its “three red lines” policy to limit leverage.
Such measures helped trigger a liquidity crisis for Hui in 2020. A failed backdoor listing for Evergrande’s mainland unit left it on the hook for as much as US$20 billion in repayments to investors.
Disputes with suppliers over unpaid bills started making headlines. Some sought asset freezes, others brought projects to a grinding halt. Local support dwindled, at least publicly, as Xi intensified his crackdown on the real estate sector and pushed ahead with his campaign to create “common prosperity.” Behind the scenes, officials urged Hui to solve his company’s debt problems as quickly as possible.
Despite Evergrande’s size, there’s little sign Beijing will act to help. A major bailout would send the wrong message when Xi is trying to rein in billionaires and close the nation’s wealth gap, said Donald Low, director of the Institute for Emerging Market Studies at the Hong Kong University of Science and Technology.
Instead, Hui has been stepping up asset sales to find the cash to repay the company’s many creditors — from retail investors demanding payment on some 40 billion yuan in Evergrande high-yield investment products, to the 1.6 million homebuyers who put deposits on apartments that have yet to be built, as well as bondholders. The company is Asia’s largest issuer of junk bonds. International ratings firms have repeatedly downgraded the company’s debt as concern grew the firm will default.
Evergrande agreed last month to sell part of its holding in a mainland bank to the local government in a deal that S&P Global Ratings said marked the first step toward solving the company’s liquidity crisis. Evergrande also negotiated the sale of a 51% stake in its property services unit to Hopson Development Holdings Ltd., Cailian reported Oct. 4.
Pressure is mounting. Evergrande hasn’t given any indication that it paid two recent dollar bond coupons, despite financial regulators encouraging the company to take all measures possible to avoid a near-term default on dollar bonds. It’s missed interest payments to at least two of its largest bank creditors. The company’s shares — which are currently suspended — are down 80% this year, while its dollar bonds are at record lows.
As Hui looks increasingly isolated, time will tell if the billionaire can find his way out of his current challenge. Even if he does, his empire is likely to look very different, as Xi pursues his ambitious plans to remodel China’s economy.
What about Malaysia’s property tycoons? In every economic cycle there has been casualties. Before and after AFC saw many disappear from the scene – Tan Sri Loy (MBf), Tan Sri Ibrahim Mohamed (Promet Bhd) and many others. In the end, it is always the bankers who hold the assets and the debt. Recovery is tough in a soft market unless a “white” knight or the Government initiate a rescue scheme, like Danaharta. This time it is going to be one-on-one with the bankers. Remember, “...the borrower is the slave of the lender”.
Reference:
How Evergrande’s rags-to-riches founder is trying to save his empire, Bloomberg (https://ceomorningbrief.theedgemalaysia.com/2021/0263/)
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