So embarrassing.
The money that was in hand now has to be given back.
Last night, Evergrande Auto announced that, due to its operational performance falling short of expectations, it has been instructed by regulatory authorities to return government incentives and subsidies it had received, totaling a whopping 1.9 billion Chinese yuan.
In response, Evergrande Auto has stated that it is in communication with local administrative authorities, and Evergrande Auto's stock will remain suspended from trading until further notice.
Just a week ago, Evergrande Auto's Hong Kong stocks experienced significant fluctuations. On May 17, the stock price surged by 70% at one point but trading was later suspended. As of the suspension, Evergrande Auto's total market value stood at 4.121 billion Hong Kong dollars.
With continuous losses and the failure of previous strategic financing plans, Evergrande Auto is now on shaky ground. Once the subsidies are returned, the next steps in operations are definitely in question. Evergrande has directly laid its cards on the table:
The above letter requires that if ultimately implemented, it will have a significant adverse impact on the financial condition and operations of the company and its various related subsidiaries.
Will there be enough money left?
Rather than being asked to return substantial subsidies, the focus is more on whether Evergrande Auto can still come up with such a large sum of money.
According to Evergrande Auto's 2023 performance report, as of December 31, 2023, its cash and cash equivalents amounted to 129 million yuan.
This means that by the end of last year, Evergrande had less than one-tenth of the substantial subsidies to be returned in its accounts, which is quite awkward.
Evergrande Auto has stated that they have planned to communicate with the relevant local administrative departments through letters.
As for the origin of this money, we need to go back to 2019. At that time, Evergrande's subsidiary, Evergrande New Energy Vehicle Investment Group Co., Ltd., signed a series of investment cooperation agreements with local government authorities.
However, the issue arose when Evergrande did not fulfill its contractual obligations as per the terms of the investment cooperation agreements.
Therefore, in accordance with relevant laws and regulations, the other party made the following demands:
Termination of the previously signed investment cooperation agreements.
Return of all rewards and subsidies previously granted to Evergrande, totaling approximately 1.9 billion yuan.
The related subsidiary companies are also required to bear joint liability.
According to the requirements of the listed company, Evergrande Auto warned in its announcement that if the demands of local government departments are ultimately enforced, it may have a serious negative impact on the financial condition and business operations of Evergrande Auto and its subsidiaries.
Obviously, this money is crucial for Evergrande Auto, whether it is for the cooperation agreements signed in previous years or for the current situation of facing huge losses.
However, Evergrande did not disclose where exactly the "relevant local administrative departments" are. According to information on the Evergrande Group's official website, in 2019, it had signed cooperation agreements with multiple governments and enterprises, as shown in the image below:
Meanwhile, in 2019, as Xu Jiayin made a big push into the automotive market, he also signed cooperation agreements with multiple companies and banks. However, most of these partnerships did not end well.
Currently, Evergrande Auto's Hong Kong stocks remain suspended from trading. Prior to this, Evergrande Auto's stock price surged by 70% on May 17th. Subsequently, Evergrande announced the suspension of trading on the same day at the Hong Kong Stock Exchange. At the time of the suspension, Evergrande Auto's stock price had risen by 53.23%, with each share priced at 0.38 yuan, resulting in a market value of 4.121 billion yuan.
In the past 5 years, Evergrande Auto has incurred losses of 110 billion yuan.
The recent 19 billion yuan loss seems to be the final straw for Evergrande Auto.
According to Evergrande Auto's financial report for 2023, the company had a gross loss of 5.1 million yuan for the year, with a total net loss of 119.95 billion yuan, a 56.64% decrease compared to the previous year, but still a substantial loss of 37.692 billion yuan.
Although the company generated revenue of 1.34 billion yuan for the year, around 1.136 billion yuan came from property sales, accounting for over 80% of the total revenue, while the automotive business contributed less than 11%.
In essence, despite being named "Auto," the company's main source of income comes from other business operations.
By the end of 2023, the Tianjin manufacturing base has produced a total of 1700 Hengchi 5 vehicles in response to market demand, with 1389 vehicles delivered. However, there is no public information available regarding whether the car factory has resumed production to continue delivering vehicles.
Most notably, as of the end of 2023, Evergrande Auto's total assets amount to 34.851 billion yuan, while its total liabilities are as high as 72.543 billion yuan. This includes borrowings of 26.484 billion yuan, trade and other payables of 43.012 billion yuan, and other liabilities of 3.047 billion yuan. The company's cash and cash equivalents on hand amount to only 0.129 billion yuan.
Obviously, the subsidy of 19 billion yuan is just a drop in the bucket compared to the current debt. Even if asked to repay, it depends on whether Evergrande Auto has the ability to do so.
In recent years, Evergrande Auto has been burning through money. In 2021-2022, the company incurred losses of 56.344 billion yuan and 27.664 billion yuan respectively. By the end of last year, Evergrande Auto had accumulated losses and shareholder losses exceeding 110 billion yuan.
Now, with Xu Jiayin facing enforcement measures and many senior executives of Evergrande being detained, the parent company, Evergrande Group, is struggling to survive. The fate of its automotive business under its umbrella is foreseeable.
In August last year, the Dubai-based Newton Group announced a $500 million investment, subscribing to about 27.5% of Evergrande Auto's shares and providing 600 million yuan in transitional funds. However, the condition was that Xu Jiayin and Evergrande Group needed to subscribe to new shares of Evergrande Auto to offset the previous debt of 20.895 billion Hong Kong dollars.
While $500 million may seem like a drop in the ocean, for the financially troubled Evergrande Auto, it is indeed a lifeline.
Evergrande has vowed that this investment will be entirely used for the Tianjin factory of Evergrande Auto to ensure the normal production of the Hengchi 5, as well as the subsequent production of other Hengchi models.
However, in fact, this so-called benefactor is far from the real deal. The founder behind this Middle Eastern benefactor actually hails from China. Despite being in the new energy vehicle industry, the predecessor of this benefactor, established in Tianjin in 2014, only released concept cars and has not produced a single mass-produced vehicle.
Moreover, from 2020 to 2022, Newton Group had zero revenue. By the end of 2022, the total liabilities of Newton Group amounted to $91.97 million, with cash and cash equivalents of only about $212 million.
The combination of these two "struggling" companies does not bode well for the outcome.
Just a month ago, Evergrande Auto officially announced the termination of the strategic investment agreement with Newton Group. The reason cited was the lack of further progress in amending the terms of the proposed transaction and debt-to-equity swaps.
With external support now confirmed to be exiting, the parent company Evergrande Group is facing uncertainties, and there are demands for subsidy refunds.
How far can Evergrande Auto go from here?
