Can it achieve self-redemption in adversity

Author | Shengma Finance Wu Ke

Editor | Ouyang Wen

Recently, China Evergrande Group announced that on March 22, the liquidator initiated legal proceedings against three defendants in the name of the company in the High Court of the Hong Kong Special Administrative Region, including Xu Jiayin, the company's former executive president Xia Haijun, and the company's former chief financial officer Pan Darong. The lawsuit gradually expanded to include four additional defendants: Xu Jiayin's spouse or former spouse Ding Yumei and three entities associated with them.

Meanwhile, China Evergrande New Energy Vehicle Group Co., Ltd. (00708.HK) announced that its related subsidiaries have entered bankruptcy reorganization proceedings. According to the announcement, the local people's court held a hearing on the bankruptcy reorganization of the related subsidiaries on August 2 and ruled that they should enter bankruptcy reorganization proceedings.

Shengma Finance notes that these legal and financial issues not only involve multiple executives of the Evergrande Group but also directly involve Xu Jiayin and his family. The various analyses and speculations surrounding billions of dollars in dividends and remuneration have once again pushed Evergrande to the forefront of public opinion.

Deeply mired in legal disputes

Public information reveals that Evergrande's legal proceedings against Xu Jiayin, Ding Yumei, and their affiliated entities in the High Court of the Hong Kong Special Administrative Region underscore the severity of its internal financial issues. The lawsuit alleges that company executives misstated financial statements from 2017 to 2020, resulting in the payment of approximately $6 billion in dividends and remuneration.

Based on this, Evergrande seeks to recover this substantial sum through legal means, with the liquidator filing the lawsuit in the company's name to hold the relevant individuals accountable. Currently, the injunction issued by the High Court of Hong Kong restricts Xu Jiayin and other defendants from disposing of assets globally.

Indeed, since Xu Jiayin was placed under compulsory measures for suspected criminal offenses and the China Securities Regulatory Commission imposed penalties on Evergrande Real Estate, including a lifelong ban on Xu Jiayin participating in the securities market, Evergrande's fate appears to have been sealed. However, many questions remain to be clarified during this process.

A host of Evergrande's senior executives are also implicated. Former executive president Xia Haijun and former chief financial officer Pan Darong currently face legal sanctions as well.

It is understood that Xia Haijun accumulated substantial wealth during his tenure at Evergrande but is also being held accountable for alleged violations of listing rules. Pan Darong, on the other hand, received severe punishment for falsifying financial statements in the annual report, with a 10-year ban from the securities market significantly impacting his career.

Additionally, Ding Yumei, Xu Jiayin's former spouse, has disappeared from public view, fueling speculation about her whereabouts. Market analysts believe the couple may have divided their assets through a 'technical divorce.' According to media reports, due to Evergrande Group's listing structure through the 'Little Red Chip' framework in Hong Kong, offshore companies in the British Virgin Islands and Cayman Islands, 100% controlled by Xu Jiayin and Ding Yumei, respectively, received a significant portion of the dividends through China Evergrande and transferred them abroad before and after the crisis. The 'technical divorce' ultimately led to these funds ending up in the pockets of Ding Yumei, the 'ex-wife abroad.'

However, the outcome of the legal proceedings remains uncertain. While Evergrande hopes to rectify financial loopholes through legal channels, whether it can successfully recover funds depends on the decisions of the parties involved and the final ruling of the court.

Bankruptcy reorganization of subsidiaries

Shengma Finance observes that Evergrande's financial difficulties extend beyond legal proceedings, as its subsidiary Evergrande New Energy Vehicle Group has also fallen into bankruptcy reorganization. An announcement in August 2024 revealed that the company has been ruled to enter bankruptcy reorganization proceedings, significantly impacting Evergrande's layout in the new energy vehicle sector.

In fact, Evergrande Auto has incurred massive losses in recent years, with the extent of these losses shocking the market. Financial reports indicate that Evergrande Auto incurred a loss of up to RMB 11.995 billion in 2023, with total liabilities reaching RMB 72.543 billion. Such significant financial pressure has strained the company's cash flow, leaving it with only RMB 128 million in cash and cash equivalents, insufficient to support its daily operations.

Under these circumstances, the future of Evergrande Auto is uncertain. Finding a sustainable development path during the reorganization process is a challenge that Evergrande must face. Whether through asset restructuring or attracting strategic investors, neither seems to be an easy task for Evergrande at present.

Meanwhile, on August 6, Guangdong Vanward Electric Co., Ltd. (hereinafter referred to as Vanward Electric, SZ002543) announced that it applied to the Guangzhou Intermediate People's Court on August 5 for bankruptcy liquidation of the debtor Guangzhou Kailong Real Estate Development Co., Ltd. (hereinafter referred to as Kailong Real Estate). The Guangzhou Intermediate People's Court formed a collegiate panel on August 6 to review the application for Kailong Real Estate's bankruptcy liquidation.

Public information shows that Kailong Real Estate holds a 60.29% stake in Evergrande Real Estate Group Co., Ltd. and a 100% stake in Evergrande Group Co., Ltd. As early as 2016, Evergrande took control of Jiakai City through Kailong Real Estate.

According to the announcement of Vanward Electric, on December 29, 2022, the Shenzhen Court of International Arbitration ruled on the arbitration case initiated by the company against Kailong Real Estate, ordering Kailong Real Estate to pay the company an investment of RMB 200 million. Kailong Real Estate was also ordered to pay interest to the company at an annual rate of 10% from March 1, 2021, until the investment was fully repaid. The arbitration fee of RMB 1,452,221 was borne by Kailong Real Estate and paid directly to the company. Kailong Real Estate was required to fulfill all payment obligations within 15 days from the date of the ruling.

However, after the ruling came into effect, Kailong Real Estate failed to fulfill its obligations as stipulated in the ruling. Vanward Electric applied to the Guangzhou Intermediate People's Court for compulsory execution, which was filed on February 14, 2023, but no payments have been received to date.

'In summary, Kailong Real Estate is unable to repay its debts as they mature, its assets are insufficient to repay all its liabilities, and it is clearly insolvent, making it eligible for bankruptcy. Therefore, in accordance with relevant laws and regulations, the company applies to the Guangzhou Intermediate People's Court for the bankruptcy liquidation of Kailong Real Estate in accordance with the law.'

The Evergrande Group is facing a difficult battle for survival. The complexity of legal proceedings, the urgency of financial restructuring, and the loss of market trust make its future uncertain. Whether Evergrande can overcome its current difficulties in the coming days will depend on its ability to address legal and financial issues and the choices made by parties who have benefited significantly from Evergrande in the past. With a vast and burdensome empire, whether Evergrande can achieve self-redemption amidst numerous difficulties remains to be seen, and the story may continue for quite some time.

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