HONG KONG (Reuters Breakingviews) - Evergrande’s electric dreams have taken an alarming turn. The property giant has already put over $4 billion into green vehicle brands and dealers. Next, it plans to plough 280 billion yuan ($41 billion) into research facilities and factories, according to statements shared on its website last week. For the same money boss Hui Ka Yan could buy Tesla, valued at $39 billion. But he’s no Elon Musk, and this could derail a debt clean-up.
As a property developer, Hui faces a long wait to reap returns on investments. The outlook is uncertain too. Although prices for new homes are rising, the government could introduce new curbs to cool the market. To hedge against such risks, the group is turning to electric cars, a new technology enjoying strong support from Beijing. But hasty diversification could do more damage than a softening real estate cycle.
A slowdown in China’s auto sales and a glut of Tesla wannabes has taken a toll. Funding is evaporating. After raising $7.7 billion in 2018, local companies attracted less than $800 million capital this year, Reuters reported on Wednesday. Luxury electric-car maker Nio has seen its stock price halve since its September listing. Evergrande’s investment into ill-starred startup Faraday Future has gone into a tailspin too.
A market correction might make it cheaper for Hui to buy the assets he needs to create a vertically integrated operation extending from battery production to dealerships. But Evergrande has little experience making cars, and could struggle to squeeze synergies from multiple acquisitions.
The expenditure could strain the balance sheet too. The group’s flagship Hong Kong-listed China Evergrande reported revenue over 450 billion yuan last year, but it is fighting to reduce leverage; its debt to EBITDA ratio is over 4, higher than most peers, according to Eikon. It has made progress, but credit ratings agency Fitch says the company’s ability to generate free cash flows rests in part on a commitment to spending less than 20 billion yuan on non-property businesses this year, and no more than 5 billion yuan the following year.
It is not yet clear which unit will foot the bill, or what the timeline will be. But if Hui moves too fast, shareholders might suffer whiplash.
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