As the deadline for delisting looms close, the embattled Chinese real estate giant Evergrande has urgently released a trio of financial reports that reveal a staggering downward spiral in its business fortunesOn the evening of July 17, the company disclosed its performance records for the fiscal years 2021 and 2022, as well as for the interim period of 2022. The bleak results reveal that Evergrande’s revenue has halved over the past two years, resulting in losses exceeding 812 billion yuan, with 686.22 billion yuan in losses attributed to 2021 and 125.81 billion yuan in 2022. Overall, its total liabilities have soared to an astounding 2.4 trillion yuan, shattering records for losses among Chinese enterprises.

Amidst these alarming numbers, it became evident that a significant portion of Evergrande’s losses—around 80%—is attributed to non-operating expenditures

For both 2021 and 2022, the company's operating losses were documented at 113.75 billion yuan and 43.39 billion yuan, respectivelyThe remaining 650 billion yuan was primarily classified as losses stemming from impairment provisions for inventories and financial assets, fair value losses on investment properties, land reclamation, and various non-operating losses.

Similar to numerous other real estate firms, Evergrande’s losses can largely be traced back to provisions for impairments of inventories and financial assets, accounting for nearly 60% of the total lossesIn total, the impairment provisions for inventories amounted to 375.37 billion yuan over the two yearsEvergrande has pointed to the overall downturn in the market environment as the primary reason for such substantial impairment provisions, frequently updating and reevaluating the valuation of its inventory in hopes that a resurgence in the market might lead to an uptick in corresponding valuations.

Experts in the field have various perspectives on the situation

• US November CPI Seals the Deal on December Rate Cut
• ETFs Leading the Tech Charge
• Nikkei 225 ETFs See Wild Swings
• Leading the Way in New Energy Vehicle Production
• Evergrande's Losses Exceed 800 Billion: Debt Restructuring Crucial

Ding Huairen, an expert from the China Registered Tax Agents Association, explained in an interview that losses incurred by companies are typically categorized as either operating losses or non-operating lossesOperating losses result from the business activities themselves, characterized by expenses exceeding income, or by excessive operational expensesConversely, non-operating losses typically include policy-driven, strategic, or non-recurring gains and losses, such as asset impairment provisions.

According to Ding, the assessment and recognition of impairment provisions for inventories rely on multiple factors, including market conditions, inventory quality, and industry trendsShould the real estate market recover in the future, rising inventories might prompt firms to reverse these recognized impairment provisionsHowever, if the market remains stagnant with little hope for upward price movement, firms would find themselves incapable of reversing such impairments, significantly impacting their future profitability.

Furthermore, Evergrande is grappling with an immense debt burden exceeding 2.4 trillion yuan and finds itself entrenched in a state of insolvency

By the end of 2022, Evergrande's total liabilities stood at 24.374 billion yuan, with contract liabilities removed accounting for 17.164 trillion yuan, reflecting an increase of over 1.1 billion yuan compared to the previous yearThese liabilities predominantly fall into three categories: trade payables and other payable accounts, which alone amount to 10.026 trillion yuan; borrowing from banks and other financial institutions, which accounts for 6.123 trillion yuan with an average interest rate of 8.12%; and other liabilities totaling approximately 101.74 billion yuan.

Nevertheless, during the same time period, Evergrande's total assets were recorded at a mere 1.84 billion yuan, with only 1.14 trillion yuan attributed to development properties, while cash and cash equivalents barely reached 4.334 billion yuanThe stark contrast between total liabilities and total assets has left Evergrande in a state of insolvency, with cash availability falling vastly short when set against short-term loans of 587.1 billion yuan

To compound matters, the company faces numerous pending legal disputes involving claims totaling approximately 395.396 billion yuan across 1,519 cases.

Given the insufficient liquidity available to cover its short-term liabilities, compounded by a growing number of lawsuits and arbitration cases, the independent auditor has declined to provide any opinion on Evergrande's fiscal reports for both 2021 and 2022. They noted numerous unresolved uncertainties regarding the company’s ongoing viability, citing potential misrepresentations in initial balances and comparative figures.

In response to its dismal performance and significant debt pressure, Evergrande announced that it experienced a liquidity crisis commencing in July 2021, which propelled the company into operational distressIn light of this, the company has endeavored to pursue solutions, including resuming work and production, ensuring property delivery, streamlining operations, and increasing asset disposals

Notably, in 2022, Evergrande refunded the land use rights for the Guangzhou Evergrande Football Stadium, yielding 5.52 billion yuan, and offloaded projects in locations such as Zhejiang and Shenzhen, recovering over 10 billion yuan in the processMoving forward, the company has vowed to prioritize ensuring property deliveries, as well as propelling operations in sectors such as new energy vehicles and property management, while exploring efficient asset disposals and revitalization strategies.

Industry analysts, such as Chen Xiao, a senior analyst from the Zhuge Data Research Center, have characterized Evergrande's ongoing debt crisis as a continuing contagion in the aftermath of its monumental collapseConsidering the company's expectations, the losses appear inevitable, particularly given the additional pressures from the declining real estate sector that have constrained corporate profitability

For Evergrande, the alarming state of insolvency marks an increase in risk exposure, with a looming threat of defaults emphasizing the critical need for debt restructuring.

Bai Wenxi, the vice chairman of the China Enterprise Capital Alliance, posits that Evergrande's skyrocketing debt levels stemmed initially from aggressive business expansion and leveraging but later escalated due to accruing interest expenses, operational costs, new sales-related debts, and expanded liability for property deliveryThe overload of financial borrowings and trade payables is alarming, particularly as the company now faces negative net assets, in addition to a flurry of restructuring proceedings and petitions for liquidation that need urgent attention.

He further posits that the vast 2.1 billion square meters of land reserve held by Evergrande, along with completed and ongoing projects currently available for sale, correspond with liabilities that necessitate continuous investment, which are unlikely to translate into effective cash flow