China Evergrande's EV unit gets the green light for restructuring

Evergrande Auto just got the go-ahead from its shareholders to sell two of its subsidiaries.

China Evergrande's EV unit gets the green light for restructuring
A surveillance camera is seen near the logo of the China Evergrande Group at the Evergrande Center in Shanghai, China, September 24, 2021. Reuters/Aly Song/File Photo

The backstory: China’s property market is a big part of the country’s economy, with some estimates saying it makes up anywhere from 17-29% of China’s GDP. But, over the last few years, it’s seen a lot of struggles, with housing being majorly unaffordable for most people and many property developers struggling with mounds of debt they couldn’t pay off. The government started cracking down on developer borrowing in 2020 to even the sector out.

But then, one of China’s biggest property developers, Evergrande, sent shockwaves through the industry when it defaulted on its debts in 2021. How bad was this, you ask? Well, Evergrande's total liabilities are over US$300 billion, making it the world’s most indebted property developer.

To deal with this crisis, the company made plans to restructure its debt, saying it could get back to normal operations within three years if all went according to plan. This debt restructuring is also the biggest in China’s history.

More recently: But, the thing is, Evergrande is a huge company, and it’s got interests in other sectors than real estate. For one, it has an automaker unit, Evergrande New Energy Vehicle Group. This auto arm focuses on producing electric vehicles (EVs) and is supposed to be a crucial part of the company’s overall turnaround, according to Evergrande’s top execs. In fact, the company’s chairman and founder Hui Ka Yan has said Evergrande would shift its main focus away from real estate and toward automaking within 10 years.

But, alongside parent company Evergrande’s announcement that it was restructuring its debt also came a warning that its auto unit could shut down if it couldn’t secure more cash. Evergrande Auto had already taken some steps to cut costs, like laying off some of its workforce. But, it still hoped to get about 29 million yuan (US$4.2 billion) in order to keep operating, launch new EV models and “achieve mass production.”

The development: Now, Evergrande Auto just got the go-ahead from its shareholders to sell two of its subsidiaries, Flaming Ace Ltd and Assemble Guard Ltd, as part of a restructuring plan. These two units, which hold 47 property projects between them, would be transferred over to another branch inside the conglomeration, the investment business Anxin Holding. This will let Evergrande Auto focus on its EV production and maybe even increase its valuation, meaning more investors and more money. With this sale, Evergrande’s EV unit said it would record a gain of about 24.79 billion yuan (US$3.59 billion).  

Key comments:

“The proposed restructuring will alleviate the company’s pressure of offshore indebtedness and facilitate the company’s efforts to resume operations and resolve issues on shore,” said Evergrande in the filing for its debt restructuring.

Evergrande Auto said that “in face of the inability to obtain additional liquidity, the group is at risk of discontinuing production,” in a statement to the Hong Kong Stock Exchange.

The restructuring deal “may help to attract investors to Evergrande Auto and raise funds,” said a separate filing by Evergrande’s EV unit.