The Motley Fool

5 vital lessons for investors from China Evergrande’s fall!

Tired or stressed businessman sitting on the walkway in panic digital stock market crash financial background
Image source: Getty Images

Global stock markets have been fragile recently. Over one month, the S&P 500 index is down 3.8% and the FTSE 100 index has lost 1.9%. One worry for investors is the potential for a global economic slowdown, especially in growth engine China. For the past fortnight, China has been rocked by fears surrounding Evergrande Real Estate Group (SEHK: 3333). The bonds and shares of the property giant have plunged lately, on fears that the group may collapse. Here are five lessons for all investors from the fall of China’s biggest real-estate developer.

1. Evergrande’s debt is a crushing burden

Evergrande is one of the world’s most heavily indebted companies. It had total liabilities (debts and other obligations) of $305bn at mid-2021. As a leading property developer, it also has massive assets (totalling almost $357bn at the end of June). Nevertheless, the developer is close to default and last month missed a scheduled interest payment to overseas bondholders. Worryingly, October could bring one of the largest debt defaults since the collapse of Lehman Brothers in mid-September 2008. Unfortunately, even cheap debt can become hard, unforgiving, and a double-edged sword.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

2. Liquidity is king

In many corporate crunches, problems caused by excessive debt can be solved by cold, hard cash. When times get tough, liquidity — the availability of cash and highly liquid assets — is crucial. Without cash at hand, a cash crunch can quickly spiral into a liquidity crisis where liabilities go unmet. When this happens, shares and bonds of cash-crunched companies can crash spectacularly. For example, Evergrande’s Hong Kong-listed shares are down more than five-sixths (-85.1%) over the past year and are currently suspended. So look out for liquidity problems within your portfolio’s businesses.

3. Diversification can be ‘diworseification’

In its efforts to become a global giant, Evergrande undertook an immense spending spree. The real-estate developer became a conglomerate, acquiring dozens of unrelated businesses. The group has invested in electric vehicles, theme parks, food and beverage businesses — and even a football team. In 2010, it bought the club now known as Guangzhou Evergrande FC and then spent $185m building a vast soccer school. It’s also building the world’s biggest soccer stadium for $1.7bn. For me as an investor, lavish spending on non-core businesses has always been a red flag.

4. Evergrande’s asset sales become fire sales

With huge debts to service, Evergrande is raising cash by selling whatever assets it can. Right now, the company is in discussions “about a major transaction”. But when desperate, ailing companies rush to sell assets in a hurry, they have little room to negotiate. As a result, sale proceeds can be considerably lower than anticipated. Hence, in times of company or market crisis, it’s important to realise that panicked or sustained selling can trigger significant falls in asset prices.

5. All booms end in busts

Over the past 30 years, China enjoyed a massive construction and housing boom. Today, real estate contributes almost three-tenths (29%) of Chinese economic output. And house prices in China — as in many other leading nations — have soared this century. In the five years to 2020, house prices soared by roughly half (50%) across China. But with Evergrande now on the brink, worries about contagion are hammering China’s property market. What’s more, with empty properties with room to house 90m people, China’s housing market could be heading for a crash in 2021/22.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription service,s such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.