Daily Observer of Electric Vehicles
According to three insiders from the development and quality departments of Evergrande Auto, most of the employees have been required to work from home and “take time off” from October 8th to October 30th. The number of these employees represents almost half of the employees at Evergrande Auto. Due to the fact that they work in the product development department, “working from home” and “time off” basically mean that all vehicle projects have come to a standstill. At present, the marketing and branding departments are still operating normally, but many business operations have already come to a halt or have even been cancelled.
Additionally, it was previously revealed by an Evergrande Auto supplier that most of the car models had already been canceled, with the exception of the Hengchi 5 and Hengchi 6 projects. However, if the development department of Evergrande Auto is “working from home,” it means that the production of Hengchi 5 and Hengchi 6 cannot continue.
Evergrande Auto’s top management disclosed to its employees that they hope to introduce financing at the end of October. However, the company as a whole has no confidence in this.
The Lifeline is Cut
Evergrande Auto originally planned to mass-produce its first car in 2022, which means that Evergrande Auto had previously relied heavily on external funding.
Moreover, Evergrande Auto has been very extravagant with its spending. Since its establishment, Evergrande Auto has been actively “buying, buying and buying,” which has consumed a huge amount of capital.
During the 2020 annual report media conference, Evergrande Auto’s management revealed that the company’s total investment in the new energy vehicle industry had reached 47.4 billion yuan, of which 24.9 billion yuan had been invested in fields such as vehicle research and development, power batteries, autonomous driving and intelligent networking, and 22.5 billion yuan had been invested in factory construction, equipment procurement, and component procurement.
Regarding revenue, since the entire vehicle has not yet been mass produced, revenue is primarily derived from power batteries. The acquisition of CENAT New Energy, while previously small in scale, was a distinctive soft-pack battery company, and currently, there is a huge demand for power batteries in the industry.
However, the 2021 semi-annual report showed that the revenue of the new energy vehicle division decreased by about 30% year-on-year. The company attributed this to the decrease in battery sales revenue and the upgrading of CENAT factories for new battery products. During the reporting period, the company continued to clear its inventory of old battery models.
An individual familiar with CENAT batteries revealed that production had come to a halt after Evergrande’s acquisition of CENAT. “They just didn’t really want to make it happen, which is a real shame.”The loss of Evergrande Auto is still expanding compared to its revenue, with a loss of 4.8 billion yuan in the first half of this year, up from 2.2 billion yuan in the same period last year. The operating loss mainly stems from its new energy vehicle division, including interest expenses of 960 million yuan for loan and investment borrowings incurred due to the acquisition of affiliated companies, research and development and marketing expenses of 790 million yuan, and option expenses of 450 million yuan.
Due to the fact that Evergrande Auto and Evergrande Health belong to the same listed company, and Evergrande Health’s revenue accounts for more than 98%, the financial situation of Evergrande Auto depends more on Evergrande Health (mostly retirement real estate).
According to the half-year report, as of the end of June this year, Evergrande Auto had signed future capital expenditures of approximately RMB 18.26 billion. However, Evergrande Auto’s restricted cash, cash equivalents, and restricted cash are only RMB 12.514 billion.
In the half year report, Evergrande Auto made a rather pessimistic description: “The group needs more funds in the short term to support future contract expenditures, debts and capital expenditures.”
At that time, management proposed the following measures, including: negotiating with suppliers and contractors to postpone payments or offset debts with projects; actively marketing; closely monitoring the cost control and capital expenditures of the new energy vehicle division; negotiating with lenders for loan renewal and extension; continuing to attract investors to support production and operations; actively seeking potential buyers and realizing some non-current assets to provide funds for operations.
Among these measures, suppliers and contractors have lost confidence due to the overall payment crisis of Evergrande Group. And the lenders, such as banks, have been stamping on Evergrande’s accounts. The attempt of Evergrande to request for deferred payments and renewal or extension of loans is basically impossible.
In addition, Evergrande Auto has set up “Ten Major Bases” across the country, exchanging land for the automotive industry, and has gained a lot of commercial land. Evergrande originally planned to develop and realize it quickly. Some projects have actually sold and received returns. However, due to the overall problem of fund flow, delayed payment to suppliers and engineering fees have occurred in the development of new energy vehicle living space support ─ which is commercial land obtained under the name of the automotive industry park, resulting in the suspension of some related projects, which cannot be used to sell houses for cash returns.
Regarding the introduction of investors, on September 24, Evergrande Auto announced that it is still in contact with various potential strategic investors to introduce new investors to the group, and is still in the process of due diligence and negotiations as of the date of the announcement. As of the date of this announcement, Evergrande Auto has not signed any legally effective agreements with investors, and there is still uncertainty as to whether the potential sale can be realized.
In addition, in the capital market, Evergrande Auto has no more options. The Hong Kong Stock Exchange’s stock price is sluggish, and the prospects are pessimistic, with no hope of further issuance. Initially, Evergrande Auto hoped to return to the A-share market. However, on September 26, Evergrande Auto announced that it has agreed with Haitong Securities Co., Ltd. to terminate the listing guidance agreement. The financing channel for returning to the A-share market has also been blocked.Therefore, the only way left for Evergrande Auto is to attract investors. The management of Evergrande Auto has expressed this hope to middle and lower level employees. However, most of the Evergrande Auto employees we have contacted are not optimistic.
Upon closer examination, Evergrande Auto’s automotive assets are actually nothing to write home about. At the time of massive acquisitions, many of the acquired companies are not of high quality. The core asset is Tianjin Guoneng Automobile Factory and its qualifications, but Tianjin Guoneng Factory has not started production. Now, the value of its qualifications has also plummeted. Evergrande Auto’s Shanghai and Guangzhou factories have been completed, but only a small part of the equipment has been haphazardly installed, which is of little value.
Regarding Evergrande Auto’s vehicle models, most of them are outsourced “turnkey projects”, and the development progress varies greatly, making it difficult to evaluate the output. Moreover, previously, Evergrande Auto had jointly developed 14 car models, released 9 of them, but there was no careful consideration for product positioning. The value of the vehicle models is also not high.
Based on this evaluation, some analysts believe that only local governments and state-owned capital, with the pursuit of social and industry stability as the purpose, can coordinate the takeover of automobile companies.
This is undoubtedly a huge hot potato.
Suppliers have large amount of outstanding payments, business is at a standstill
In the previous stage of Evergrande’s massive acquisitions, many of the debts owed by some of the acquired companies were not recognized by Evergrande Auto, leading to litigation.
However, as the financial chain of Evergrande Group tightens, Evergrande Auto’s outstanding payments to suppliers have become widespread. Many suppliers have stopped project progress and are waiting for payment or watching the situation unfold.
On the evening of September 24, Evergrande Auto announced that due to liquidity pressure, some of its daily expenses have been suspended, and some suppliers have stopped supplying, making it unable to guarantee the financial obligations under the relevant contracts will be fulfilled.
Moreover, the debt collection wave has also hit Evergrande Auto. Just at the Evergrande Auto Nansha factory, employees who had just moved from Shenzhen were confronted with on-site sit-ins from migrant workers who were demanding payments.
For some suppliers, losing Evergrande Auto as a major client is a huge regret.
One Evergrande Auto supplier said that during the epidemic last year, Evergrande Auto helped the industry chain through the crisis, “we are grateful. Many friends working at Evergrande are also in difficulty, and we are maintaining close communication with them, hoping they can get through the crisis.”The other supplier expressed a week ago that the impact of Evergrande Group on Evergrande Auto was beyond doubt, but the project could not be withdrawn since the Hengchi 5 project was still progressing.
However, after a week, what’s left of Evergrande’s projects is likely to come to a standstill.
Not only has product development come to a halt, but also Evergrande Auto’s previous marketing preparations have been interrupted or even cancelled. At the beginning of 2021, Evergrande Auto announced plans to quickly establish 36 Hengchi showrooms and 1,600 Hengchi sales centers. When funds were abundant, Evergrande Auto was in a hurry to select sites and sign contracts, but now it has to begin to terminate these contracts.
What about the employees?
Evergrande Auto’s arrangements for working from home and taking leave mean to employees that if they have other options, they might as well leave on their own.
At present, Evergrande Auto employees’ salaries for August are paid as usual, but whether they will be paid for September depends on the situation in October, with the possibility of not being able to pay.
Moreover, employees who have received notices to work from home may have to accept half pay.
On September 21, Evergrande Auto issued a notice granting over 30 million share options to more than 3,000 technological and scientific employees at an exercise price of HK$3.9. Normally, share incentive schemes are a means of boosting employee morale. However, Evergrande Auto’s share price has already fallen to HK$2.3 (closing price on September 28), and is still on a downward path. No one will pay HK$3.9 to exercise their options.
Currently, Evergrande Wealth’s wealth management products face redemption risks, but Evergrande Auto employees are not obliged to buy them. Some employees have bought some of them on their own, while some employees’ purchases of Evergrande’s real estate have been frozen.
Before September 23, Evergrande Auto’s employees in Shenzhen had already moved to Guangzhou Evergrande Nansha plant. For Shenzhen employees, commuting time increased by more than an hour, which resulted in nearly 20% of employees leaving.
Currently, many Evergrande Auto employees are looking for new jobs.
Evergrande Auto employees are extremely angry about this crisis. Some employees believe that on the one hand, Xu Jiayin turned a blind eye to the problem and made a bragging response, but on the other hand, he had already withdrawn himself from it. Moreover, the crisis facing Evergrande is due to Xu Jiayin’s autocratic style and corporate culture.
Some other employees think that the core of the crisis is the lack of trust among the people, and that “Mr. Xu treats everyone as his opponent.”
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.