New signs of liquidity pressure on China Evergrande Group emerged late Friday night when the collapsing mainland developer’s electric car unit warned that it would need to find new sources of capital in order to continue production and meet its financial commitments.
After explaining that attempts to sell assets and find new investors have yet to produce an agreement, China Evergrande New Energy Vehicle Group, which earlier this year had a market capitalisation greater than that of General Motors, said it had stopped payments to suppliers and that its ability to meet its payroll is in doubt.
“If the said potential introduction of strategic investments and/or the potential sale of assets cannot materialize within a short period of time, the Group will lack further capital injection, which is expected to affect the daily operations of the Group, worsen its ability to pay employees’ salary and/or other expenses,” the company said in a statement to the Hong Kong stock exchange.
The late-night admission came one day after China Evergrande Group failed to make an $83.5 million payment to offshore bondholders, and followed by just over one month Evergrande New Energy Vehicle’s announcement that it had lost $740 million during the first half of 2021 as it struggles to produce its first car.
Staff Unpaid, Production Uncertain
While the situation described by Evergrande NEV in its announcement paints a dire image of its finances, it may represent an incomplete picture of events, according to recent reports.
Mid-level managers at the company, who are normally paid on 20 September, failed to receive their checks last week, according to an account in Bloomberg. On 21 September, Evergrande NEV announced that it would be granting stock options equivalent to 3.31 percent of its issued shares to employees and some independent, non-executive directors to “ensure the interests of the Group as a whole and its long-term development stability”.
As Evergrande attempts to mollify staff with share options, its financial crisis appears to threaten the nascent car company’s ability to meet the target announced in April of this year to begin production on its Hengchi-branded cars in the fourth quarter of this year.
In the Friday statement, Evergrande NEV said of the failure to secure new financing, that, “It will, at the same time, impede the research and development progress of new energy vehicles and have a material adverse impact on the Group’s mass production of new energy vehicles.”
Evergrande NEV had RMB 124.5 billion in current liabilities at the end of June against RMB 9.6 billion in cash and equivalents. On Friday it said that, “In view of the difficulties, challenges and uncertainties in improving its liquidity as mentioned above, there is no guarantee that the Group will be able to meet its financial obligations under the relevant contracts.”
One day after Evergrande NEV reportedly missed payroll, Charles Chan Kwok-keung’s China Strategic Holdings said it planned to dispose of up to 133.6 million shares in Evergrande NEV. In a statement to the Hong Kong exchange, China Strategic said, “The Company noted the recent significant price fluctuations of the Evergrande Vehicle Shares and the Company may, depending on the prevailing market sentiments and market conditions, from time to time in the future dispose of the Evergrande Vehicle Shares.”
Since reaching an all-time peak of HK$72.25 ($9.28) per share in February, shares in Evergrande New Energy Vehicle had slid to HK$2.23 each by the time the market closed on Friday, after falling 23 percent that day. China Evergrande Group had said in August that it was in talks to sell stakes in its automotive unit and in other subsidiaries as its cash crunch worsened.
On Wednesday last week the government of Anqing, the capital of eastern China’s Anhui province, said it was cancelling the land use rights to a mixed-use project that Evergrande had agreed to purchase in March 2020. A statement on the city land bureau’s website said Evergrande had failed to pay the RMB 877 million ($136 million) land premium after winning the 335,452 square metre (3.6 million square foot) project at a government auction.
Car Startup Out of Gas
In its Friday announcement, Evergrande NEV said that projects which had been suspended due to its inability to pay suppliers, as earlier disclosed in its 2021 interim report, remained stalled.
The statement by chairman Shawn Siu also said that it continued to explore potential agreements with strategic investors to secure fresh capital, and indicated that due diligence and negotiation are still in progress. However, it warned that it remains uncertain whether any deal could be consummated.
The near-collapse of Evergrande NEV brings nearer to a close an attempt by Evergrande boss Xu Jiayin to jump from the company’s roots in building apartments into direct competition with Tesla to produce high-tech electric cars.
Xu stitched together Evergrande NEV through a series of acquisitions in 2018 and 2019, including paying an undisclosed amount in early 2019 to purchase Michigan-based Protean Holdings. In January of that same year, Evergrande had spent $930 million to acquire a majority stake in electric car technology firm National Electric Vehicle Sweden.
Those purchases of electric car technology holders came after Xu had tried unsuccessfully in 2018 to take over Jia Yueting’s Faraday Future electric car maker after investing $2 billion in the would-be Tesla challenger.