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Dividend Forecasting

 
China Evergrande – Former regional top payer to suspend dividends amid looming liquidity crisis
KYG2119W1069

Yang Yang, CFA, 23rd September 2021

 

· China Evergrande was among the Top 10 of dividend payers in the Hong Kong market in 2018

· Payout level of the company has been lowered from 50% to 27% amid regulatory clampdown on leverage

· IHS Markit Dividend Forecasting projects dividend suspension all the way out to FY2023 for the firm, with potential ramifications for other listed real estate developers and the banking sector

 

Heightened credit risk despite deleveraging efforts

China Evergrande, China’s second-largest property developer by sales and the former top dividend payer in the APAC region, is wrestling with a liquidity crisis despite the efforts to cut its leverage. The company accelerated its deleveraging process after the regulators introduced the “Three Red Lines” last year. However, despite all measures their liquidity condition has further deteriorated, with some payables related to property development overdue; leading to the suspension of work on some projects of the company. The regulatory bodies, PBOC and CBIRC, summoned the management of the company last month in a rare move and urged the company to reduce its liquidity risk. Rating agencies such as S&P have downgraded the company in view of its leverage woes. The company also warned of cross-default risks last Tuesday, highlighting the slipping contract sales and the lack of progress in asset disposals. 

The government shows no intention to bail out the embattled property giant so far, but given that ‘common prosperity’ is a top agenda for the CCP and that residential home buyers are in the cross hairs of a full-blown default of China Evergrande – it is likely that we see, for a lack of better words, a controlled demolition that contains a broader system wide fallout whilst ensuring a precedent is not set for incubating moral hazards of a ‘too big to fail’ nature.  

Forecast rationale

The company used to distribute around 50% of its earnings as its dividend. The payout ratio was reduced to 27% for FY20 amid the regulatory clampdown on the leverage. The company has been offering extensive promotions and sales price concessions to deal with its liquidity issues, which have eroded margins and failed to shore up its liquidity crisis. The delivered price decreased by 11.2% y-o-y and the gross margin plunged to 12.9%, according to its latest interim report. The company remains one of the most leveraged property developers in China, with net debt to equity ratio of 216.2% as of 30th June 2021. The company reported declining contract sales for June, July and August, and highlighted the downward trend would continue due to dampened confidence of potential property purchasers. The combined effect of decreasing sales and gross margin could result in further deterioration of liquidity. In view of its worsening balance sheet and the increased risk of default, we are expecting the company to suspend its dividend payments for the upcoming years.

Risk to our forecast

The company has been exploring the opportunity to divest its assets including its stakes in China Evergrande New Energy Vehicle Group(0708.HK) and Evergrande Property Services Group(6666.HK) as well as its office building in Hong Kong. If the company makes remarkable progress in the asset disposal plan, it may be able to weather the liquidity crisis and continue its dividend payment, though a large dividend cut should be expected as the earnings are set to drop significantly.

Wider impact

While recent developments indicate China Evergrande has been able to reach some arrangements with its onshore bond holders, the troubles are far from over for the firm. Any disorderly liquidation of its liabilities could potentially impact other regional real estate developers and banks which are caught in the maelstrom. With real estate firms and banks collectively paying US$51 bn in aggregate dividends in 2020 – which amounts to 43% of total dividends paid out by HK listed firms in 2020, the potential risks will continue to remain high for the moment. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Upcoming projections*

Interim dividend per share CNY 0.00
Amount confidence level MEDIUM
Interim dividend ex-date 15-Jun-2022
Ex-date confidence level LOW

 

 

 

 

Key financial ratios*

  FY20 FY21E FY22E
Payout ratio 27.0% 0.0% 0.0%
Dividend yield 1.0% 0.0% 0.0%
Sales growth 6.2% -7.6% 6.8%
Net debt/equity 364.7% 216.6% 144.8%

 

     

Peer comparison*

   
Company Name Net Debt/Equity EBIT/Interest Expense  
China Evergrande Group 61.9% 0.8x  
Country Garden Holdings 27.2% 3.0x  
China Vanke 21.8% 11.0x  
   
     
     

 

 

 

 

Dividend Yield*

*Source: FactSet, IHS Markit

 

 
For more information, please contact dividendsupport@ihsmarkit.com
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