Evergrande Stock Down 48% in September – Is Bankruptcy Imminent?

The price of Evergrande stock has gone down 48% in September while the stock has shed more than 85% of its value since the year started as the company’s collapse seems imminent amid its struggles to deal with a huge $300 billion debt burden.

So far this morning, Evergrande (HKEX: 333) is shedding another 10% at HKD 2.28 in Hong Kong as the company was reportedly offering properties to key lenders as pressure keeps mounting for the management to respond.

Evergrande is China’s largest real estate group and the company has interests in multiple areas of the economy. Its collapse could spell bad news for the global markets and the country’s financial sector as it could force banks to liquidate assets to shore up their balance sheets ahead of a seemingly imminent default.

Can Evergrande stock continue to go down and how bad its bankruptcy could be for the stability of the financial markets? In the following article, I’ll attempt to shed some more light on these questions.

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Evergrande Stock – Technical Analysis

The price of Evergrande stock has collapsed to its lowest level since 2011 as market participants appear to be expecting a full-blown implosion of the firm amid a seemingly imminent default on its large debt.

Banks have already been warned that they won’t receive interest payments from the company on a group of loans that are due this Monday while a set of bond coupons scheduled to mature on Thursday might not be paid either.

According to its latest financial report, Evergrande had a total of $300 billion in long-term borrowings that it has progressively amassed to finance the development of its real estate projects during what was a booming phase in the Chinese housing market.

Data from YCharts show the extent of the impact that this event is having on the firm’s valuation as Evergrande’s market capitalization has declined from around $50 billion back in 2017 to less than $5 billion this morning.

Thus far, the stock is dangerously approaching its all-time low of HKD 1.83 and it could soon hit that mark if more negative news about its debt keep coming. The monthly chart above shows the extent of this decline, with the monthly Relative Strength Index (RSI) hitting oversold levels for the first time since the stock started to trade in the Hong Kong Exchange while the MACD has plunged to the lowest levels in its history.

Evergrande Stock – Fundamental Analysis

The Evergrande crisis could turn into a systemic problem if the company is forced to liquidate its assets as this could have a ripple effect on the financial industry both in China and overseas.

Banks with exposure to Evergrande’s collapsing business will probably have to write down any loans they had extended to the company and that could result in a tightening of their capital ratios.

As a result, the affected financial institutions would have to liquidate other assets – typically the riskiest ones – to ramp up their capital buffers and that could prompt a market-wide sell-off.

So far this morning, stock futures in the United States are taking a beating with the Dow Jones Industrial Average (DJIA) dropping by nearly 2% while the S&P 500 is down a similar 1.8%.

Some analysts have compared the Evergrande’s debacle as China’s Lehman Brothers event and that might be true considering how far the company’s tentacles go in both the country’s domestic economy and globally.

According to a document leaked back in 2020, the number of banks exposed to Evergrande was around 249 including 128 financial institutions and 121 non-financial entities.

Data collected by UBS indicated that two near-term coupon dates could set things in motion for Evergrande. These are two coupon payments that have to be made by the firm on 23 and 29 September.

Meanwhile, the company has three other coupon payments scheduled to take place in October and that could “seal the deal” for the battered Chinese real estate developer if it fails to meet those obligations as well.

All in all, markets appear to be reacting negatively to the potential collapse of this important puzzle piece of the global economy and the ripple effects of a seemingly imminent default could be witnessed throughout the week as a deleveraging event seems to be unfolding.

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