[Market Madness] September 2021 Edition
Off to Never-Evergrande-Land
Administrative topics and an introduction
Well folks, we’re back for the September edition of Market Madness.
It comes as no surprise that this month’s edition is going to be focused primarily on Evergrande and the deteriorating situation with the real estate conglomerate.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Oh, so Evergrande!
Our FinTwit friend, Kyla, made a great two-piece article early on into the overarching coverage of the situation (part 1 and part 2). Kyla puts together a thoughtful and overarching view or Evergrande, which serves as a nice primer to someone new to the company and its difficult financial situation:
Evergrande is the second largest real estate developer in China and formerly the world’s most valuable real estate brand, and now the world’s most leveraged. They do a lot more than real estate though - they own a football team, a bottled water company, and solar panels, and some pig farms, just for a few quick examples.
In their annual report, they state: “Evergrande has completed the transformation from real estate to ‘diversified industries and digital technology’ through:
Evergrande Auto: The goal to become the world’s largest, powerful new energy vehicle enterprise. They are now trying to sell this arm of this business. No one wants it.
Evergrande property services: The goal to become the world’s largest intelligent urban service provider
HengTen Networks: an online media streaming platform
Fangchebao Group: The largest online and offline transaction and service platform for properties and automobiles in the world
Evergrande Fairyland: An indoor entertainment facility that sounds like its an iteration on the metaverse with “phyiscal amusement and online entertainment”
Healthcare: They have between 30-70 healthcare projects operating off its data platform, that offers customized medical and healthcare solutions
Evergrande Spring: Healthy food product shopping platform
They diversified their brands - but in the end, that doesn’t seem to ~have mattered~.
We also cannot forget our good friends at PETITION, who put together a banger of an essay on Evergrande as well (💥What the Bloody Hell is Happening with Evergrande?💥). They did an excellent job breaking down the different parties involved in Evergrande and who’s at risk to write off their investment in the company should it all go to zero.
There is a lot of news out there about Evergrande and its current predicament, but also (as Kyla points out) a lot of misinformation too. Since the onset of the panic, we’ve moved from considering full-blown financial meltdown to the self-contained blowup of single company gone awry.
The future of the company, the real estate sector in China, and the global financial economy at large appear to hang in the balance of what the Chinese government does to stop the bleeding. Given how interconnected the global markets are with one another, it makes sense to have concerns regarding how American greenbacks (US investment dollars) will fare in the larger investment world.
From this lens, there is valid concern for widespread financial loss across even the most passive investors who are simply investing in Vanguard or BlackRock funds. They’d not even know that they held some exposure to Evergrande. But how does simple investment loss translate into a 2008-like collapse? It appears that will depend on how China reacts to the worsening situation and how they step in to backstop any serious collapse or losses.
Zoom forward from last week to this week, the market community was waiting with bated breath to see if Evergrande would meet their interest payment that came due. Spoiler; they didn’t.
Reeling under $305 billion of debt, Evergrande missed a payment deadline on a dollar bond last week, and its silence on the matter has set global investors wondering if they will have to swallow large losses when a 30-day grace period ends. (Reuters)
In escalating efforts to keep the company afloat, several local governments have set up special custodian accounts to directly channel homeowner payments to complete existing projects and not funneled to servicing creditors.
What’s more, there are still ongoing analyses and estimations for how truly large the funding gap is for Evergrande and what is going to be needed to keep the projects funded and ongoing. National and local governments continue to monitor the situation and prepare for the possibility of a full company collapse.
So far, this has been a regurgitation of information that is all easily accessible to anyone with google and 45 minutes of time. Regardless of whether Evergrande collapses, there’s nothing we can do now to save our exposed investments.
What does matter is how the investor community makes sense of these kinds of systemic risks and thoughtfully learns from the mistakes of others. I find this aspect most interesting, as the comparisons to Lehman Brothers are remarkably timely.
Before Evergrande, it was the airlines and cruise lines during the height of the pandemic selloff. In the time since, we’ve seen remarkable stock market growth and a multitude of new all-time highs. But in that surprising market boom, everyone seems to be looking even harder for the pin to burst the proverbial bubble. The amount of skepticism in the market is also at all-time highs.
As for me, I’m comfortable saying that I am not sure where we go from here or what is destined to happen next. It should come as no surprise that the financial trouble Evergrande is in cannot be remedied overnight; when you’re unable to service even interest payments, let alone pay your employees, it’s safe to say you’ve got some problems on your hands.
The bigger question, one that is going to take a lot longer to derive an outcome, is how the narrative will unfold behind the company, the contagion efforts, and the broader market appetite for similar companies in the future. As someone who was not around to intellectually witness the 2008 financial crisis (I’ve read plenty of books on it, however), it is interesting for me to continue watching the events unfold in real time.
Additional Threads, Articles, and Ideas on Evergrande:
A few pallet cleansers:
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
[Market Madness] Edition 0147