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Asia’s Former Richest Man Faces Debt Crunch While Chasing Electric Car Dream

Real estate tycoon Hui Ka Yan is pushing ahead with his ambitious plan to become the Elon Musk of China by ploughing billions of dollars into electric vehicles, but the venture looks increasingly risky as funding becomes scarce and China’s slowing economy weighs on his core property business.

Hui was in Shenzhen on Wednesday to announce that Evergrande had reached an agreement with five global auto firms to jointly develop 15 new models, ranging from full-size luxury to midsize and compact sedans.

“China is poised to become a world leader in the production of new energy vehicles,” Hui said in a press release. “The agreement allows Evergrande New Energy Vehicle Group to become a major force in this development.”Today In: Asia

Last week, Hui was in Italy meeting with executives from Pininfarina working on design proposals for a new model called Hengchi. He was also briefly in Germany this month, where he held a banquet for 60 auto executives who were attending a local trade show.

The globetrotting billionaire, who was once crowned Asia’s richest man, has been busy meeting suppliers and potential partners after failing to make good on a previous pledge to unveil a mass production model in June. The plan now is for Evergrande to begin manufacturing EVs next year, but skepticism is mounting.

Analysts question whether Evergrande can find success in what has become a fiercely competitive EV market that requires more expertise than it currently has. And that challenge is made even more difficult by the company’s strained finances.

“With the ongoing investment in the EV business, Evergrande’s short-term debt position, rather than seeing a meaningful improvement, actually got a bit worse over the course of the first half,” says Christopher Yip, senior director at S&P Global Ratings.

Evergrande had 206.8 billion yuan ($29.1 billion) in cash and cash equivalents as of June this year, but faces a whopping 376 billion yuan in short-term borrowing that will mature within a year. Evergrande’s net gearing ratio, measured by total debt and shareholder’s equity, stands at 151.2%—versus its previous pledge of reducing the metric to below 100%.

The company’s Hong Kong-listed shares have tumbled 30% this year, while the benchmark Hang Seng Index is little changed.

For Evergrande, there’s no turning back. Hui views his $3.6 billion investment in electric cars as a means to diversify a business that already includes interests in a theme park and football team.

The majority of those investments have been done through a separately listed healthcare unit, Evergrande Health, which now has interests in a battery maker, a motor manufacturer and an auto sales network.

In a statement sent to Forbes, a company spokesperson said it’s currently aiming to become the world’s largest EV maker in the next three to five years, and sell as many as 5 million vehicles within the next 10 years.

In September, Evergrande placed recruitment ads seeking to hire as many as 8,000 people globally for a newly established research institute, including for positions such as auto design and battery management.

“It seems that they want to be in every part of the EV industrial chain,” says John Zeng, a Shanghai-based director at consultancy LMC Automotive. “But there is a big question mark over whether the company can successfully integrate so many different parts together.”

Adding further to Evergrande’s troubles is the central government’s decision to cut back on state support for the industry. After authorities began phasing out of EV purchase subsidies in March, sales reversed years of gains to drop 4.7%. In July, as consumer enthusiasm took a beating, according to the China Association of Automobile Manufacturers.

Evergrande said in the aforementioned statement that it would make forward-looking plans based on industry trends, and build Hengchi into a world-renowned brand by integrating its best resources in different areas.

Danielle Wang, head of China property research at DBS Bank, said the company does expect to encounter obstacles when it enters an entirely new market. But she also concedes that the investments are slowing down its deleveraging process, especially as China’s real estate market is losing momentum.

“They are more aggressive than their peers in lowering property down payments or offering installments to consumers,” Wang says. “Such financing will make it slower to get cash, and I don’t think the company can deleverage by a large margin towards year end.”

Evergrande reported a 24.4% drop in revenues to 226.98 billion yuan in the first half, while profit tumbled 45% to 30.35 billion yuan.

The aforementioned spokesperson also said its medium- to long-term goal is to reduce its net gearing ratio to an industry low point, and to achieve this it will adopt measures such as strengthening sales and accelerating the collections of its accounts receivables.

But some expect liquidity to get even tighter. To reduce speculative purchases and keep prices in check, China is ordering state-run banks to curb the growth of loans to the property sector.

Evergrande has been increasingly reliant on foreign currency-denominated debt, accumulating as much as $20 billion in offshore borrowings towards the end of 2018, according to Nigel Stevenson, a Hong Kong-based analyst at GMT Research.

Such a large portion could potentially make refinancing more expensive, as the Chinese currency could devalue further amid an ongoing trade war with the U.S. To juice up investor demand, Evergrande is already offering one of the highest interest rates on its dollar-denominated notes, paying 10.5% when it sold in April $300 million worth of five-year notes due in 2024.

“Evergrande has been good at raising financing through one means or another,” Stevenson says. “They do seem to be ready to offer very high yield, if they have to do so.”

Article Credit : Yue Wang