Evergrande Profit Falls 49% in 2019 1H as Car Unit Loses RMB 2B

China’s third-largest developer by sales, China Evergrande Group, has warned shareholders of falling profits for the first half of the year, according to an alert filed with the Hong Kong stock exchange last Friday.

The Shenzhen-based real estate giant told shareholders that unaudited accounts reveal a 49 percent drop in net profit and a 45 percent decline in core profit for the first six months of 2019 compared with the same period last year.

In a separate announcement to the stock exchange, the developer’s “health management” subsidiary, Evergrande Health, which includes its electric vehicle operations, informed shareholders that it expects to record a loss of RMB 2 billion ($280 million) for the first half of the year.

The profit warnings come as the debt-laden developer, which had piled up total borrowings of RMB 673 billion by the end of 2018, at which time it outlined a need to pay RMB 318 billion in loans falling due by the end of this year, still faces a further RMB 182 billion that must be paid by the close of 2020.

Falling Profit Follows Nationwide Drop in Sales

The company, whose chief executive officer Xia Haijun purchased a HK$155 million ($20 million) Hong Kong penthouse last month, said in its statement to the bourse that net profit for the six months ended 30 June is predicted to be in the region of RMB 27 billion, down from RMB 53 billion for the corresponding period last year.

Net profit from the group’s core business – defined as net profit excluding fair value gains or exchange gains or losses from real estate development – is expected to be around RMB 30 billion, down from RMB 55 billion.

The developer attributed the decline in profit to a decrease in the amount of housing delivered during the first half of the year, with revenue collection dependent on the company’s ability to deliver homes to its clients.

In January, Evergrande revised upwards its contracted sales objective for the year, setting a new target of RMB 600 billion — RMB 50 billion more than had originally been set — despite a housing market downturn.

Regardless of that earlier optimism, last month the developer chaired by entrepreneur Xu Jiayin announced that its contracted sales had shrunk by more than seven percent in the first six months of the year, falling to RMB 282 billion compared with RMB 304 billion from January to June 2018.

China’s largest developer by sales, Country Garden. also reported a drop in new contracts for the same period, with China Vanke being the only developer in the nation’s top three to achieve an uptick in deals signed at the half year.

Sales for China’s top 100 developers fell 29 percent for the first seven months of 2019, according to CRIC data.

Evergrande’s Auto Business Not Yet Up to Speed

Evergrande’s health business, which includes its electric car initiatives, is adding to Evergrande Group’s financial challenges, after suffering a RMB 2 billion net loss during the first half of the year.

After showing a profit of RMB 200 million during the first six months of 2018, Evergrande Health blamed its losses this year on its new energy vehicle operation, which “is in its early investment stage and resulted in an increase in research and development and other related costs and interest payments’.

The subsidiary of China Evergrande Group reassured shareholders that the development of the health management segment of the business remained stable.

Chairman Xu Jiayin’s group has spent in excess of $1 billion this year in an attempt to corner the electric vehicle market as it tries to acquire every part of the production chain, with the ultimate goal of manufacturing between 500,000 to 1 million electric vehicles annually in three years’ time.

Seven months ago, the company acquired a 51 percent stake in Swedish electric vehicle manufacturer NEVS for $930 million, an acquisition that was quickly followed by the purchase of a 58 percent stake in lithium battery producer Shanghai Cenat New Energy for RMB 1.1 billion and a €150 million ($168 million) investment in Swedish supercar manufacturer Koenigsegg Automotive AB.

In May, the company spent an undisclosed amount to acquire Protean Holdings Corp, a UK manufacturer of in-wheel drive systems for electric cars through its Sweden-based subsidiary NEVS.

Electric Cars Give Developer a Bumpy Ride

Evergrande’s 2019 electric car losses come after the company had already suffered setbacks due to its failed investment in Jia Yueting’s Faraday Future, an electric supercar maker that has yet to produce and sell a vehicle.

After agreeing to invest $2 billion in the ailing carmaker in the second half of last year, the developer became embroiled in a legal dispute with LeEco boss Jia Yueting, who controls Faraday, over the rights to the remaining intellectual property of the defaulting car maker and and the conditions for the company to receive further payments from Evergrande.

EV sales in China last year hit 1.2 million, accounting for more than half of the world’s total sales.