China: Suppliers Take a Hit from Evergrande’s Financial Woes

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China Evergrande’s financial woes take a bite out of suppliers

Property developer’s spiraling debt crisis ripples far and wide

Officials have ordered the demolition of dozens of buildings at troubled China Evergrande’s manmade Ocean Flower Island in Danzhou over allegations of illegal building permits.

KENJI KAWASE, Nikkei Asia chief business news correspondent
February 3, 2022 17:52 JST

HONG KONG — Angry bondholders aren’t the only ones smarting from China Evergrande Group’s spiraling woes.

The embattled property developer faces mounting unpaid bills to suppliers across the country, from a Beijing-based construction materials company to interior designers in Shenzhen, and they say that Evergrande’s troubled finances are dragging them into the red, according to a Nikkei Asia review of the listed companies’ public filings. 

The revelations highlight a ripple effect triggered by the high-profile unraveling of what was once China’s top property developer, as the heavily indebted company struggles to repay a growing list of creditors at home and abroad. Almost $20 billion of Evergrande’s international bonds are now deemed to be in default.

Among the hardest-hit suppliers was Jangho Group which booked a credit impairment loss of 1.68 billion yuan ($264 million) linked to Evergrande and its subsidiaries at the end of 2021.

The company, which sells interior decorations and outer-wall coverings for some of Evergrande’s myriad buildings, warned in a Shanghai Stock Exchange filing late Friday that it holds out little hope of ever being paid, calling the outstanding receivables “impossible to collect on time”. 

It blamed the overdue bills, mostly linked to its interior decoration unit, for what the company now expects will be a net loss of between 940 million yuan and 1.12 billion yuan last year, reversing a 948 million yuan profit in 2020.

Jangho Group is not alone.

More than 20 listed Chinese suppliers, also including furniture makers and a real estate agency, report being stung by Evergrande’s delinquent payments. Some are suing the developer in a bid to recoup the unpaid bills. 

Shanghai-listed Guangdong Tianan New Material warned after markets closed Friday that Evergrande’s 286 million yuan in unpaid bills would help drag it into a net loss of up to 65 million yuan for 2021, reversing a year-earlier profit of some 38.28 million yuan.

The company, which supplies ceramic building materials, said it was “proactively seeking to find a resolution” through negotiations with Evergrande, but added that it would likely have to write off its debt in full. 

Meanwhile, Shanghai-listed paint maker Asia Cuanon Technology (Shanghai) booked a 598 million yuan impairment loss linked to a dozen of China’s growing list of troubled property developers. But it said that Evergrande was responsible for the lion’s share at some 84% of unpaid receivables and commercial bills.

In its latest annual report, the Shanghai company listed Evergrande’s main domestic subsidiary, Hengda Real Estate Group, as its biggest client with sales of some 183 million yuan in 2020. Like other suppliers, it is on track for a 580 million yuan loss last year, erasing a year-earlier profit.

Asia Cuanon said it was working to cut its Evergrande-linked losses through “negotiations, lawsuits and other channels”.

Others have been less direct in linking their problems to Evergrande.

Previous financial disclosures, however, suggest they too have been left high and dry by the developer, which is scrambling to put together a restructuring plan as demands from its creditors grow louder by the day.

Last week, Evergrande told creditors it was aiming to have an initial restructuring plan within six months, in what was its first communication with them since the developer’s finances started to head south a year ago. 

The ailing company vowed to protect stakeholder rights and listen “carefully” to creditor demands on their outstanding debt.

Evergrande’s shares have plunged about 89% in the past year as its debt crisis spiraled.   © Reuters

Evergrande’s crisis has also spread to other Chinese developers struggling to repay their debts and dented the country’s property market, a key driver of the world’s No. 2 economy.

“If a serious detrimental change happens to one of our major customers, it will have a relatively large negative impact on the company’s results,” Shenzhen Jianyi Decoration Group warned in its latest annual report in April. 

The company, on track for a net loss of as much as 1.15 billion yuan last year, did not name the client which defaulted on a string of commercial bills. But sales to Evergrande in 2020 topped 1 billion yuan, about 46% of the supplier’s revenue.

Interior design company Shenzhen Grandland Group, meanwhile, reported 3.24 billion yuan in overdue commercial bills issued by what it described as its “No. 1 customer and its subsidiaries.”

Grandland, on track for a loss of as much as 5 billion yuan for 2021, has previously said that about 45% of its 2020 revenue was connected to Evergrande.

Grandland’s close links to Evergrande, including taking part in a $20 billion recapitalization of the troubled company’s Hengda Real Estate unit five years ago, have also soured.

In January, Shenzhen Investment, the southern Chinese city’s Hong Kong-listed investment arm, said it would book a fair-value loss of about 6 billion Hong Kong dollars ($770 million) on that investment.

Interior design company Shanghai Trendzone Holdings has also been hurt by its reliance on the huge developer. 

The Shanghai company has warned it would book a loss as high as 1.2 billion yuan, from a 133 million yuan net profit in 2020, after earlier saying that unpaid client receivables were piling up.

Shanghai Trendzone revealed that Evergrande’s unpaid bills started coming overdue as early as April last year. Now, it said it was “intentionally cutting back” on Evergrande business and instead trying to find new customers, including state-owned developers thought to be in better shape than their privately-owned peers.

But that strategy may not be bearing fruit — its nine-month revenue to September dropped 42% from a year ago and the company is suing Evergrande and subsidiaries to recoup unpaid bills, with interest.

Source: Nikkei Asia

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