Citron Research questions Evergrande finances and fraudulent practices21 June, 2012, 12:11. Posted by Zarathustra
We don’t think we are surprised to hear that. After all, we have discussed at length previously about corruption in China and how officials and real estate developers are really hands and gloves in their money-making machine.
We wouldn’t be surprised that if developers other than Evergrande are frauds in one form or another. In fact, we will be surprised that they are not.
Here’s what Citron Research has to say about Evergrande:
Our analysis and primary research reveal that: 1] Evergrande is insolvent; and 2] Evergrande will be severely challenged from a liquidity perspective.
The Company’s management has applied at least 6 accounting shenanigans to mask Evergrande’s insolvency. Our research indicates that a total write-down of RMB 71bn is required and Evergrande’s pro forma equity is negative 36bn.
Over the past 5 years, Evergrande has executed an untoward program of bribes aimed at local government oﬃcials in order to build its raw land industry. To ﬁnance growing cash ﬂow shortfalls related to these bribes, subsequent land purchases, and related real estate construction activities, Evergrande has employed a complex web of Ponzi-style ﬁnancing schemes. These schemes are characterized by a reliance upon perpetually growing pre-sales, oﬀ-balance sheet partnerships and IRR guarantees to third parties.
Evergrande’s business model is unsustainable, and is showing signs of severe stress. Management is working hard to cover-up the company’s precarious and rapidly deteriorating ﬁnancial condition. However, with presales and condo prices now falling rapidly, with its income statement and assets materially overstated, and with its oﬀ-balance sheet guarantees looming as more and more imminent liabilities, our analysis suggests that the cover-up has entered its ﬁnal inning.
Meanwhile, the Company’s management team has consistently displayed gross lapses of judgment. Ranging from “mail order” advanced degrees, to the diversion of more than US$2.5 billion of company resources to fund frighteningly oﬀ-strategy pet endeavors, the evidence of management misconduct at Evergrande is shocking.
You can read the whole thing here.
Meanwhile, the share price of Evergrande is down more than 17%.