E-House Comes Unhinged in China's Real Estate Crash, Joining List of Victims

Key takeaways:

•      E-House defaulted on $298 million worth of bonds that matured April 18, though it said this week that bondholders had agreed on a restructuring plan

•      The company’s default adds to a string of similar missed payments by Chinese developers amid a deepening slump in the nation’s property market

By Warren Yang

China’s deepening real estate crash is generating a fast-growing cluster of fallen stars.

The latest casualty is E-House (China) Enterprise Holdings Ltd. (2048.HK), a former hot-shot specializing in real estate services, which counts e-commerce giant Alibaba BABA as a major shareholder. The company said last week it failed to repay $298 million worth of dollar bonds that matured on April 18, which led to a cascade of “cross-defaults” on other debt securities linked to those bonds.

Such inter-linking of debt is relatively common in China, allowing a single default to quickly spiral into a much larger problem for companies.

E-House first flagged the possibility of a default at the end of last month as it sought to get bondholders to exchange their notes for new ones and agree to amend terms. That attempt ultimately failed before the deadline, but E-House said Monday that the majority of holders of the defaulted bonds have since then agreed to a restructuring plan.

Times are rough not just for E-House but for pretty much all property businesses in China.

China’s property market expanded at a sizzling rate in the past two decades, fueled by freewheeling borrowing by developers that constructed new homes and commercial properties at breakneck speed after years of neglect during the nation’s planned economy era. Now, Beijing wants to slow things down, partly by reining in real estate companies’ borrowing, which makes it hard for them to fund new projects and refinance existing debt.

Adding to that, interest rates globally are rising, translating to higher borrowing costs, constraining developers’ abilities to build new properties and cutting off refinancing channels. As prospects for Chinese real estate firms worsen, global rating agencies have been downgrading them or even withdrawing their ratings completely. That just adds fuel to the fire by making borrowing through international debt markets costlier or outright unfeasible for affected companies.

At the same time, housing sales across China are plunging because of Covid-19 restrictions and declining household incomes, leading to revenue declines for property developers and service agencies like E-House that rely on transactions for their income.

Stress among Chinese real estate companies made global headlines when China Evergrande (3333.HK), which holds the dubious title of the world’s most indebted real estate company, defaulted on its debt late last year. Evergrande was hardly alone. The number of Chinese property developers that have defaulted on their dollar bonds in the past year can’t be counted on two hands, according to a Wall Street Journal tally. Other defaulters include Zhenro Properties (6158.HK) and Fantasia Holdings (1777.HK), both listed in Hong Kong.

Also reflecting the sector’s troubles, many Hong Kong-listed Chinese real estate companies have failed to report their 2021 results before a March 31 deadline. Fantasia is among that group as well.

Worthless shares

Developers’ troubles have trickled down to companies like E-House because the former provide products around which the latter build their business. E-House managed to grow its revenue last year by nearly 10%, a respectable achievement given the deep market downturn, helped by income from Leju Holdings Ltd., an online real estate marketing company E-House acquired in November 2020.

But E-House lost about 9.4 billion yuan ($1.4 billion) for the year as allowances for potential losses from unpaid developer bills surged. Its debt-to-equity ratio shot up to more than 200% at the end of 2021 from a tad under 65% a year earlier as its cash holdings and business shrank.

Given the company’s dire situation, it’s no surprise that E-House shares barely hold any value, trading at less than HK$1, or less than $0.15. Based on its 2021 revenue, the stock’s current value translates into a miniscule price-to-sales (P/S) ratio of just a little more than 0.1. 

Shares in other Chinese property companies that have defaulted are similarly distressed. Zhenro shares are down nearly 84% this year to well below HK$1, while Fantasia stock was worth HK$0.20 before it was suspended because of its failure to release its 2021 results on time.

The demise of E-House’s stock is a far cry from its high-profile Hong Kong IPO in 2018, which took place about two years after it delisted from the New York Stock Exchange. The Hong Kong listing, which was backed by Alibaba and more than two dozen property developer customers including Evergrande, gave E-House a market capitalization of about $3.4 billion at that time. Its latest value is a fraction of that, worth around $150 million based on its latest stock price on Tuesday.

Whether E-House or any other Chinese property company can return to their former glory days is doubtful. To be sure, Beijing probably doesn’t want the property downturn to ruin an economy that is now reeling anew from Omicron outbreaks. It is already taking some steps to save the sector by easing mortgage restrictions, signaling that it won’t just stand by while the sector continues to crash. But it’s also highly unlikely that Beijing will allow developers to “party like it’s 2005” again, given that it wants to curb real estate speculation and create a healthier property market. 

For E-House, though, its ties to Alibaba can be a lifeline. The e-commerce titan sold its online real estate sales platform, Tmall Haofang, to E-House in November via an equity swap under a strategic alliance. Tmall’s large user base can also bring more business to E-House, augmenting its online operations that already received a boost from the addition of Leju.

Also, now that E-House has set aside substantial funds to cover receivables at risk of non-payment, it may not need to keep setting as much money aside. A reduction of such allowances would reduce the company’s costs, helping it inch back to profitability, at least to some extent. Now the market just needs to show some signs of life to move E-House and its many peers onto a more sustainable longer-term track.