(Bloomberg) -- China Evergrande Group warned that it risks defaulting on borrowings if its all-out effort to raise cash falls short, rattling bond investors in the world's most indebted developer.
"The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business," the Shenzhen-based company said in an earnings statement on Tuesday. "Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group."
The company said it's exploring the sale of interests in its listed electric vehicle and property services units, as well as other assets, and seeking to bring in new investors and renew borrowings. Still, sharp discounts to swiftly offload apartments cut into margins, helping push net income down 29% to 10.5 billion yuan ($1.6 billion) in the first half of the year, in line with an earlier profit warning.
The result underscores the challenge for billionaire founder Hui Ka Yan to reduce the group's debt while also sustaining profitability. Evergrande's bonds sank toward fresh lows as investor confidence in its ability to repay debts continued to erode. While borrowing fell, total liabilities that include bills owing to suppliers edged up to 1.97 trillion yuan, near a record high.
"Evergrande's gross margin could compress further on the potential fire sale of its properties," said Bloomberg Intelligence analyst Lisa Zhou. The gauge of profitability is the lowest among major developers tracked by BI due to aggressive promotions and price cuts, Zhou wrote in a note.
In a further blow, even long-term allies are signaling they've had enough. Chan Hoi-wan, chief executive officer of Chinese Estates Holdings Ltd. and wife of Hong Kong billionaire Joseph Lau, made her first sale of Evergrande shares, cutting her holdings to 8.96% from 9.01%, a filing showed.
Evergrande's 8.75% note due 2025 fell 1.5 cents on the dollar to 34.7 cents, according to Bloomberg-compiled data. Its shares earlier closed 0.7% lower in Hong Kong trading, taking this year's decline to 71%.
Company executives refrained from briefing on the results, leaving investors and analysts to parse through the statement for guidance on its financial health. With banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China's economy, raising questions over whether it might receive state support. Regulators urged Evergrande to resolve its debt woes in a rare public rebuke earlier this month.
Evergrande said some property development payables were overdue, leading to the suspension of work on some projects. The company is negotiating with suppliers and construction contractors to resume the work, it added.
"The group will do its utmost to continue its operations and endeavor to deliver properties to customers as scheduled," it said.
For more details on the earnings, click here.
Evergrande's debt shrank to 572 billion yuan, the lowest in five years, according to Bloomberg calculations based on the results. That's down 20% from 717 billion yuan at the end of last year and 15% from 674 billion yuan in March. Still, trade and other payables climbed 15% from six months earlier to a record 951.1 billion yuan.
The company still falls short on two of China's so-called three red lines -- metrics imposed on developers as part of a crackdown on leverage in the industry. It has pledged to meet all three by December 2022.
One measure -- the ratio of cash to short-term borrowings, a gauge of liquidity -- worsened in the period to 36% from 47% at the end of last year, as its cash and equivalents plunged to the lowest in six years, Bloomberg calculations based on the results show.
Revenue recognized from projects delivered plunged 17% to 222 billion yuan, the lowest for the same period in four years. Gross margin almost halved to 12.9% from six months earlier, the lowest since at least 2008.
(Updates with analyst comment in the fifth paragraph)
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