Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<p><strong><em>*Bank Call Reveals Nothing: </em></strong>A competitor held a conference call with Ping An Bank (000001.CH) [PAB]. According to management, the market has over-reacted to risks associated with China Evergrande Group (3333.HK) [Evergrande] and certain other developers. Further, PAB believes that policymakers in Beijing are likely to maintain stable growth within the property sector and coordinate the completion of housing projects – and this “should contain” any spillover effect;  </p><p><strong><em>*What Wasn’t Addressed:</em></strong> The Group has real estate-related exposure which represents 24.3% of Ping An Insurance’ (2318.HK) [Ping An] stated equity – more so depending which insurance subsidiary (likely Ping An Life [PAL] given the shortfall in 1H21 earnings) this risk is attributed to. There was no mention of Ping An remaining a source of strength to PAB given the PAL stress, nor if PAB participates in real estate financings led by Ping An - normal practice for conglomerates in mainland China; and  </p><p>*<em><strong>Negative Credit Delta Could Accelerate Capital Raise: </strong></em>By our analysis, we find that PAB credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized at 2Q21 - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at the current level, we find that PAB’s reserves still remain quite light by CNY 16 bn - representing about two quarters of pre-tax earnings.   </p>

*Bank Call Reveals Nothing: A competitor held a conference call with Ping An Bank (000001.CH) [PAB]. According to management, the market has over-reacted to risks associated with China Evergrande Group (3333.HK) [Evergrande] and certain other developers. Further, PAB believes that policymakers in Beijing are likely to maintain stable growth within the property sector and coordinate the completion of housing projects – and this “should contain” any spillover effect;  *What Wasn’t Addressed: The Group has real estate-related exposure which represents 24.3% of Ping An Insurance’ (2318.HK) [Ping An] stated equity – more so depending which insurance subsidiary (likely Ping An Life [PAL] given the shortfall in 1H21 earnings) this risk is attributed to. There was no mention of Ping An remaining a source of strength to PAB given the PAL stress, nor if PAB participates in real estate financings led by Ping An - normal practice for conglomerates in mainland China; and  *Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that PAB credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized at 2Q21 - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at the current level, we find that PAB’s reserves still remain quite light by CNY 16 bn - representing about two quarters of pre-tax earnings.   

<p><strong><em>*Disposal of Shengjing Bank Stake:</em></strong> China Evergrande Group (3333.HK) [Evergrande] announced that it is selling a 19.93% stake in Shengjing Bank (2066.HK) at a take-under price of CNY 5.70 per share (19.8% below market) or at a P/BV or 51.4% - representing a MTM loss of CNY 9.9 bn (USD 1.53 bn) or approximately 2.5% of Evergrande’s stated equity; and  </p><p><strong><em>*Systemic Banking Risk Highlighted: </em></strong>Evergrande is alleged to have USD 20 bn in “direct and indirect” risk due to Shengjing Bank, which would represent a true systemic challenge given the bank's size and importance. If the Evergrande exposure of CNY 129.4 bn is remotely correct, it would appear that Shenjiang Bank has been materially under-reporting NPLs. If this figure is correct, a reserve shortfall of CNY 128.4 (USD 19.9 bn) would appear to exist – representing 158% of 2Q21 stated equity and intimating Shengjing Bank is technically insolvent.</p>

*Disposal of Shengjing Bank Stake: China Evergrande Group (3333.HK) [Evergrande] announced that it is selling a 19.93% stake in Shengjing Bank (2066.HK) at a take-under price of CNY 5.70 per share (19.8% below market) or at a P/BV or 51.4% - representing a MTM loss of CNY 9.9 bn (USD 1.53 bn) or approximately 2.5% of Evergrande’s stated equity; and  *Systemic Banking Risk Highlighted: Evergrande is alleged to have USD 20 bn in “direct and indirect” risk due to Shengjing Bank, which would represent a true systemic challenge given the bank's size and importance. If the Evergrande exposure of CNY 129.4 bn is remotely correct, it would appear that Shenjiang Bank has been materially under-reporting NPLs. If this figure is correct, a reserve shortfall of CNY 128.4 (USD 19.9 bn) would appear to exist – representing 158% of 2Q21 stated equity and intimating Shengjing Bank is technically insolvent.

China Evergrande Group – Daisy Chain Pulled

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
<p>I estimate <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group (3333 HK)</a> (CEG) is trading at an extraordinary <strong>discount to NAV of 93%</strong> against a one-year average of 77%. </p>
</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/889/original/image_37048166931631684887321.png?1631684888" class="editor-image img-responsive" data-smartkarma-image-id="229889"></figure>
</div>
<div style="text-align: left;" class="content-caption">Source: CapIQ, my estimates. According to <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" data-smartkarma-citation="entities:96:1" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0408/2021040802085.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to <a href="https://www.smartkarma.com/entities/hengten-networks-group-ltd" target="_blank" data-smartkarma-citation="entities:3296:1" rel="noopener">HengTen Ltd (136 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0427/2021042700547.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds <a href="https://di.hkex.com.hk/di/NSForm2.aspx?fn=CS20210826E00320&amp;sa2=as&amp;sid=223&amp;corpn=HengTen+Networks+Group+Ltd.&amp;sd=15%2f09%2f2020&amp;ed=15%2f09%2f2021&amp;cid=0&amp;sa1=cl&amp;scsd=15%2f09%2f2020&amp;sced=15%2f09%2f2021&amp;sc=136&amp;src=MAIN&amp;lang=EN&amp;g_lang=en&amp;" target="_blank" rel="noopener">26.55%</a>.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.</div>
<p>The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. </p>
<p>The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.</p>
<p>Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in <em><a href="https://skr.ma/jrXuN" target="_blank" rel="noopener">StubWorld: What To Do With Evergrande?</a></em>; and in greater depth by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a>, in which he said in his latest insight <em><a href="https://skr.ma/KkUHL" target="_blank" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a></em>: </p>
<blockquote>
<p>Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.</p>
<p>Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. </p>
</blockquote>
<ul style="list-style-type: disc;">
<li>It need not be said, the general consensus is bearish.</li>
</ul>
<hr>
<div>
<h3>The New News</h3>
<ul>
<li>Early yesterday morning, Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0914/2021091400059.pdf" target="_blank" rel="noopener">announced</a> it expects significant declines in contract sales in September.</li>
<li>Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.</li>
<li>Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: <em>"ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group</em>."</li>
<li>Evergrande added it is actively exploring with potential investors the sales of part of its interests in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.</li>
</ul>
<blockquote>
<p>In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.</p>
</blockquote>
<ul>
<li>Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.</li>
</ul>
<p><strong><em>Separately ...</em></strong></p>
<ul>
<li>Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. </li>
<li>This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, <a href="https://www.thestandard.com.hk/section-news/section/2/234150/Evergrande-tries-to-calm-investors" target="_blank" rel="noopener">The Standard</a>, and others. </li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/892/original/image?1631686617" class="editor-image img-responsive" data-smartkarma-image-id="229892"></figure>
<p><em>Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: <a href="https://www.mingtiandi.com/real-estate/finance-real-estate/china-evergrande-hires-houlihan-lokey-as-financial-advisor/" target="_blank" rel="noopener">Mingtiandi</a>)</em></p>
</div>
<div>
<ul>
<li>Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. </li>
<li>Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). </li>
</ul>
</div>
<p>The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. </p>


I estimate China Evergrande Group (3333 HK) (CEG) is trading at an extraordinary discount to NAV of 93% against a one-year average of 77%. 




Source: CapIQ, my estimates. According to Shengjing Bank Co Ltd H (2066 HK)'s 2020 annual report (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to HengTen Ltd (136 HK)'s 2020 annual report (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds 26.55%.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.
The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. 
The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.
Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in StubWorld: What To Do With Evergrande?; and in greater depth by Travis Lundy, in which he said in his latest insight Evergrande as a Study of Quantum Mechanics Theory: 

Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.
Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. 


It need not be said, the general consensus is bearish.



The New News

Early yesterday morning, Evergrande announced it expects significant declines in contract sales in September.
Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.
Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: "ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group."
Evergrande added it is actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services (6666 HK) - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.


In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.


Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.

Separately ...

Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. 
This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, The Standard, and others. 


Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: Mingtiandi)



Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. 
Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). 


The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. 

Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting

Travis Lundy

<p>Evergrande is manifesting itself now in a state not dissimilar to a famous Cat from the thought experiment devised by Erwin Schrödinger in 1935 in his discussion with Albert Einstein regarding the Einstein, Podolsky, Rosen ("EPR") article (designed to show that quantum mechanics theory was incomplete) earlier that year. </p>
<p>What the now-famous Mr Schrödinger intended as a modest proposal of sorts (he had no desire to see live and dead cats discussed as a theory) has become a mainstay of popular understanding of quantum mechanics. </p>
<p>The basic idea was a refutation of the then-dominant <a href="https://plato.stanford.edu/entries/qm-copenhagen/" target="_blank" rel="noopener">Copenhagen Interpretation</a> (the name applied to a group of ideas discussed and promoted by Neils Bohr, Werner Heisenberg, Arnold Sommerfeld, and others). Schrödinger's idea was that one could create a quantum superposition (i.e. Evergrande alive, and Evergrande dead) making the outcome dependent on a quantum particle which was in a superposition (i.e. banks are simultaneously being told not to lend, and to lend). Schrödinger's point about the cat was to show that it was kind of ridiculous having the cat be both alive and dead at the same time, but the analogy stuck. </p>
<p>Backing up a bit, one problem discovered early in the process of studying quantum mechanics was that one could not simultaneously observe and measure an electron and determine its momentum (so as to be able to catch it later and re-measure). The problem is known as the Measurement Problem. Some of the math around understanding the concept is in that related to the Heisenberg Uncertainty Principle which provides the math about accuracy and certainty. This was part of Bohr's universe of knowledge in the late 1920s and at the time, Bohr's thought was that the cause of some of the uncertainty of future electron momentum was the impact of the measurement apparatus. After the EPR paper, Bohr decided that the states of the apparatus and that which was being measured could not be separated, and instead were a single dynamic of inseparable form. </p>
<p>It is important to note that the Uncertainty Principle is not the same as the Observer Effect which suggests that measurement of certain systems cannot be made without affecting the system. Heisenberg and later Bohr used the OE as a physical reason why quantum uncertainty existed. </p>
<div class="content-highlight">
<p><em><strong>How is this related to Evergrande? </strong></em></p>
<p>Well, any analyst looking to discuss Evergrande and Schrödinger's Cat, even if doing so using Hugh Everett's "Many Worlds" Interpretation is going to put the rest of it below the fold. </p>
</div>
<p>But first some news...</p>
<h3>The NEW News</h3>
<p>On 9 August, I wrote the latest in my series on <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> in <a href="https://www.smartkarma.com/insights/evergrande-s-room-for-manoeuvre-a-question-of-confidence" target="_blank" rel="noopener">Evergrande's Room for Manoeuvre - A Question of Confidence</a>. This had followed discussion of financing difficulties and buybacks, ratings cuts, etc in <a href="https://www.smartkarma.com/insights/evergrande-s-very-special-special-dividend" target="_blank" rel="noopener">Evergrande's Very Special... Special Dividend?</a> and others. </p>
<p>There is ongoing news/suggestion of Evergrande negotiating the sale of its 55 urban renewal projects in Shenzhen, where local media suggest that potential buyers include a couple of subsidiaries of Shenzhen's SASAC (including Shenzhen Investment Holdings Ltd). This process, perhaps worth RMB 120bn as some media suggests, has been ongoing for months but more news is coming out.</p>
<p>Since Monday, we have had headlines about <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> selling all or part of its stakes in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" rel="noopener">Evergrande Auto (708 HK)</a> (which itself <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0809/2021080901359.pdf" target="_blank" rel="noopener">came out with a profit warning</a> on 9 Aug) and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" rel="noopener">Evergrande Property Services (6666 HK)</a> under pressure from Beijing, with one local HK <a href="https://inews.hket.com/article/3029626/%E3%80%90%E6%81%92%E5%A4%A73333%E3%80%91%E5%82%B3%E8%90%AC%E7%A7%91%E3%80%81%E7%A2%A7%E6%A1%82%E5%9C%92%E8%88%87%E6%81%92%E5%A4%A7%E7%89%A9%E6%A5%AD%E5%9B%A0%E5%83%B9%E6%A0%BC%E5%95%8F%E9%A1%8C%E6%9C%AA%E6%9C%89%E5%85%B1%E8%AD%98%E3%80%80%E5%B7%B2%E9%80%80%E5%87%BA%E6%94%B6%E8%B3%BC%E3%80%80%E6%81%92%E5%A4%A7%E7%89%A9%E6%A5%AD%E8%B7%8C%E9%80%BE7-%EF%BC%88%E7%AC%AC%E4%BA%8C%E7%89%88%EF%BC%89" target="_blank" rel="noopener">report</a> suggesting the entire services business could go to Vanke. Caixin suggested there were negotiations between Evergrande and others, including Vanke, CoGard, Shenzhen Metro, China Jinmao, and others, with Vanke reportedly leading the combined efforts. Shares and USD bonds of Evergrande popped. Also the units popped in price, with Evergrande Property Services rising 60% from Monday's lows to Wednesday's highs, and Evergrande Auto rising 40% from low to high. </p>
<p>It is possible that the rises in both were caused by significant short-covering. The shorts in the shares (314mm as of 30 July according to SFC data) are not quite 25% of the Real World Float. The CNY bonds - <a href="http://www.szse.cn/disclosure/listed/bulletinDetail/index.html?a45f8727-1d71-43ed-af73-7bb11aeb8033" target="_blank" rel="noopener">restricted to QIB-equivalents since Monday</a> - continued to fall. </p>
<p>Reuters additionally <a href="https://www.reuters.com/world/china/debt-laden-evergrande-says-sale-talks-certain-assets-shares-jump-2021-08-11/" target="_blank" rel="noopener">reported</a> that according to corporate search engine Tianyancha, Evergrande had pledged its holdings in Xinjiang Guanghui Industry Investment and Evergrande Life Insurance to Shengjing Bank at the end of July (and I remind readers that bank regulators have effectively instructed the local govt to <em>Do Something</em> about the fact that Evergrande owns a large stake in and may quasi-control <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>, and a large portion of its loans are to Evergrande (noting also that Shengjing was fined in the past couple of months for lending too much to real estate projects)).  </p>
<p>Late Wednesday REDD reported (and Bloomberg followed up) that Beijing had ordered the local Guangzhou government to coordinate with creditors and strategic investors (and speed things up to avoid systemic risk). There was also mention that Evergrande's debt "<em>should be resolved via a "market-oriented" approach.</em>" </p>
<p>Out Thursday early it was said that three banks had agreed to extend the maturity of loans out to Evergrande. China Minsheng Banking, China Zheshang Banking, and Shanghai Pudong Development Bank had apparently agreed to the extensions. Specifically, Zheshang apparently agreed to push repayment to year end for two loans due in July and August (i.e. one of them was already expected to have been repaid (and wasn't?)) according to a Bloomberg <a href="https://www.bloomberg.com/news/articles/2021-08-12/evergrande-gets-loan-extensions-from-several-major-creditors" target="_blank" rel="noopener">article</a>. </p>
<p>Thursday afternoon, state media China National Radio, work had been halted on two projects in Kunming, one of them with overdue payments of RMB 210 million (China Yicai <a href="https://www.yicaiglobal.com/news/evergrande-stock-drops-further-as-yunnan-housing-projects-are-halted-over-unpaid-dues" target="_blank" rel="noopener">article</a>).</p>
<p>Late Thursday, it was reported that Vanke and Country Garden had removed themselves from negotiations on Evergrande Property Services because of differences on price. Personally, I think Evergrande Auto (708) may be unsellable. </p>
<p>A WSJ <a href="https://www.wsj.com/articles/evergrandes-enormous-bill-finally-comes-due-11628761706?mod=djemheard_t" target="_blank" rel="noopener">commentary</a> by columnist Jacky Wong noted there are ever more stories about trade payables not getting paid, and counterparts refusing to take commercial acceptance bills. </p>
<p>And very late Thursday there were <a href="https://www.straitstimes.com/business/companies-markets/china-halts-approvals-for-new-residential-real-estate-funds" target="_blank" rel="noopener">articles</a> that China had halted private equity firms from raising money to invest in residential property developments. The govt-endorsed Asset Management Association of China (AMAC) apparently told private equity firms that it would not accept new registrations for funds to invest in projects, and would reject the applications already in. Existing funds would not be affected. While not a direct hit to Evergrande, what it means is this particular avenue for being able to sell down project assets is no longer a possibility.</p>
<p><em>Discussion of how to read between the lines of the news, and Evergrande's existence as a quantum mechanical phenomenon continues below the fold.</em></p>

Evergrande is manifesting itself now in a state not dissimilar to a famous Cat from the thought experiment devised by Erwin Schrödinger in 1935 in his discussion with Albert Einstein regarding the Einstein, Podolsky, Rosen ("EPR") article (designed to show that quantum mechanics theory was incomplete) earlier that year. 
What the now-famous Mr Schrödinger intended as a modest proposal of sorts (he had no desire to see live and dead cats discussed as a theory) has become a mainstay of popular understanding of quantum mechanics. 
The basic idea was a refutation of the then-dominant Copenhagen Interpretation (the name applied to a group of ideas discussed and promoted by Neils Bohr, Werner Heisenberg, Arnold Sommerfeld, and others). Schrödinger's idea was that one could create a quantum superposition (i.e. Evergrande alive, and Evergrande dead) making the outcome dependent on a quantum particle which was in a superposition (i.e. banks are simultaneously being told not to lend, and to lend). Schrödinger's point about the cat was to show that it was kind of ridiculous having the cat be both alive and dead at the same time, but the analogy stuck. 
Backing up a bit, one problem discovered early in the process of studying quantum mechanics was that one could not simultaneously observe and measure an electron and determine its momentum (so as to be able to catch it later and re-measure). The problem is known as the Measurement Problem. Some of the math around understanding the concept is in that related to the Heisenberg Uncertainty Principle which provides the math about accuracy and certainty. This was part of Bohr's universe of knowledge in the late 1920s and at the time, Bohr's thought was that the cause of some of the uncertainty of future electron momentum was the impact of the measurement apparatus. After the EPR paper, Bohr decided that the states of the apparatus and that which was being measured could not be separated, and instead were a single dynamic of inseparable form. 
It is important to note that the Uncertainty Principle is not the same as the Observer Effect which suggests that measurement of certain systems cannot be made without affecting the system. Heisenberg and later Bohr used the OE as a physical reason why quantum uncertainty existed. 

How is this related to Evergrande? 
Well, any analyst looking to discuss Evergrande and Schrödinger's Cat, even if doing so using Hugh Everett's "Many Worlds" Interpretation is going to put the rest of it below the fold. 

But first some news...
The NEW News
On 9 August, I wrote the latest in my series on Evergrande Real Estate Group (3333 HK) in Evergrande's Room for Manoeuvre - A Question of Confidence. This had followed discussion of financing difficulties and buybacks, ratings cuts, etc in Evergrande's Very Special... Special Dividend? and others. 
There is ongoing news/suggestion of Evergrande negotiating the sale of its 55 urban renewal projects in Shenzhen, where local media suggest that potential buyers include a couple of subsidiaries of Shenzhen's SASAC (including Shenzhen Investment Holdings Ltd). This process, perhaps worth RMB 120bn as some media suggests, has been ongoing for months but more news is coming out.
Since Monday, we have had headlines about Evergrande Real Estate Group (3333 HK) selling all or part of its stakes in Evergrande Auto (708 HK) (which itself came out with a profit warning on 9 Aug) and Evergrande Property Services (6666 HK) under pressure from Beijing, with one local HK report suggesting the entire services business could go to Vanke. Caixin suggested there were negotiations between Evergrande and others, including Vanke, CoGard, Shenzhen Metro, China Jinmao, and others, with Vanke reportedly leading the combined efforts. Shares and USD bonds of Evergrande popped. Also the units popped in price, with Evergrande Property Services rising 60% from Monday's lows to Wednesday's highs, and Evergrande Auto rising 40% from low to high. 
It is possible that the rises in both were caused by significant short-covering. The shorts in the shares (314mm as of 30 July according to SFC data) are not quite 25% of the Real World Float. The CNY bonds - restricted to QIB-equivalents since Monday - continued to fall. 
Reuters additionally reported that according to corporate search engine Tianyancha, Evergrande had pledged its holdings in Xinjiang Guanghui Industry Investment and Evergrande Life Insurance to Shengjing Bank at the end of July (and I remind readers that bank regulators have effectively instructed the local govt to Do Something about the fact that Evergrande owns a large stake in and may quasi-control Shengjing Bank Co Ltd H (2066 HK), and a large portion of its loans are to Evergrande (noting also that Shengjing was fined in the past couple of months for lending too much to real estate projects)).  
Late Wednesday REDD reported (and Bloomberg followed up) that Beijing had ordered the local Guangzhou government to coordinate with creditors and strategic investors (and speed things up to avoid systemic risk). There was also mention that Evergrande's debt "should be resolved via a "market-oriented" approach." 
Out Thursday early it was said that three banks had agreed to extend the maturity of loans out to Evergrande. China Minsheng Banking, China Zheshang Banking, and Shanghai Pudong Development Bank had apparently agreed to the extensions. Specifically, Zheshang apparently agreed to push repayment to year end for two loans due in July and August (i.e. one of them was already expected to have been repaid (and wasn't?)) according to a Bloomberg article. 
Thursday afternoon, state media China National Radio, work had been halted on two projects in Kunming, one of them with overdue payments of RMB 210 million (China Yicai article).
Late Thursday, it was reported that Vanke and Country Garden had removed themselves from negotiations on Evergrande Property Services because of differences on price. Personally, I think Evergrande Auto (708) may be unsellable. 
A WSJ commentary by columnist Jacky Wong noted there are ever more stories about trade payables not getting paid, and counterparts refusing to take commercial acceptance bills. 
And very late Thursday there were articles that China had halted private equity firms from raising money to invest in residential property developments. The govt-endorsed Asset Management Association of China (AMAC) apparently told private equity firms that it would not accept new registrations for funds to invest in projects, and would reject the applications already in. Existing funds would not be affected. While not a direct hit to Evergrande, what it means is this particular avenue for being able to sell down project assets is no longer a possibility.
Discussion of how to read between the lines of the news, and Evergrande's existence as a quantum mechanical phenomenon continues below the fold.

Evergrande as a Study of Quantum Mechanics Theory

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<p>In StubWorld this week ...</p>
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<p><a href="https://www.smartkarma.com/entities/indofood-sukses-makmur-tbk-p" target="_blank" data-smartkarma-citation="entities:1053:1" rel="noopener"></a>Beleaguered <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a>'s shares bounced after the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0810/2021081001009.pdf" target="_blank" rel="noopener">said</a> it is in talks to sell stakes in two of its units. But optimism over improved capital management appears naive. </p>
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<p>Preceding my comments on Evergrande are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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<p>As always, more below the fold.</p>
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In StubWorld this week ...




Beleaguered Evergrande Real Estate Group (3333 HK)'s shares bounced after the company said it is in talks to sell stakes in two of its units. But optimism over improved capital management appears naive. 




Preceding my comments on Evergrande are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


As always, more below the fold.


China

Shengjing Bank Co. Ltd. provides banking services. The Company offers various financial services, funds business, international business, and investment services for individuals and small and medium enterprises.

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