DR. YANGA’S COLLEGES, INC.

COLLEGE OF BUSINESS ADMINISTRATION

CHINA EVERGRANDE GROUP – CASE STUDY

In partial fulfilment of the subject requirements in

GLOBAL FINANCE WITH ELECTRONIC BANKING

1st Semester, A.Y. 2023-2024

Submitted to

Teddy R. Nieveras, MBA

Submitted by:

LEALYN L. ALQUISOLA
JESSA CABAL
REDGIE DELA CRUZ
OWIN JOAQUIN ENCINAS
VIEN CLARENCE F. SIOSON

BSBA – 4A
Bachelor of Science in Business Administration
Major in Financial Management

2023
 Table of Contents

Section Pages

ISSUE AT HAND .............................................................................................................................1

NECESSARY INFORMATION ........................................................................................................1

THEORIES TO CONSIDER ............................................................................................................2

EXPECTED OUTCOMES................................................................................................................3

GAME PLAN....................................................................................................................................4

ACTION PLAN ................................................................................................................................5

REFORMS TOWARDS SUSTAINABILITY OF THE GAME PLAN ..............................................7

INTEGRITY IMPACT .......................................................................................................................7

TRANSFORMATIVE IMPACT TO MULTI-STAKEHOLDERS ......................................................8

YIELDS AND INSIGHTS .................................................................................................................9

References: ...................................................................................................................................... 11

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 ISSUE AT HAND
The Chinese economy heavily relies on real estate, which contributes nearly a quarter of
its GDP and impacts various related industries like construction, steel, cement, and furniture. Real
estate plays a crucial role in generating income and wealth for local governments and households
in China. However, Evergrande, one of China's largest real estate developers, is facing a debt
crisis due to a combination of factors, including government regulations, high debt levels, and
falling demand and prices. This case study facilitates determining the strategies that must be
taken to minimize the consequences and risks of the Evergrande crisis on the global economy.
This study will focus on solving the problem of Evergrande by minimizing the consequences and
risks of the Evergrande crisis on the global economy. Specifically, this study will answer the
following questions:

General Problem:

What strategic measures can be implemented to minimize how the Evergrande crisis affects the
global economy?

Specific Problems:

1. What are the effective options for Evergrande to restructure its debt and avoid defaulting
on its obligations to its creditors, investors, and customers?
2. What strategies can Evergrande employ to mitigate the risks of a potential company
default and prevent a broader downturn in the real estate sector, given its significant role
in the country's economy?

NECESSARY INFORMATION
China Evergrande Group, formerly known as Evergrande Real Estate Group, is a Chinese
property developer based in Shenzhen, Guangdong. It is one of China's biggest property
developers, wherein the company engages in real estate development, investment, operation,
and construction. It mostly sells apartments to upper- and middle-income residents. The company
is also involved in hostel operations, the healthcare industry, and new energy vehicles
(GlobalData, n.d.).

Evergrande, on the other hand, is in a financial crisis. The company relied heavily on
borrowing money to fund its rapid expansion and diversification into numerous sectors such as
electric vehicles, sports, and bottled water, which contributed much to the crisis. In an article by
CNN Business, Toh (2021) reported that the company has accrued more than $300 billion in debt,

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making it the world's most indebted property developer. In addition, the company was under
increasing pressure from the Chinese government, which has tightened real estate regulations to
reduce excessive borrowing, speculation, and increased housing prices. The government
implemented the "three red lines" regulation on some developers in 2020, requiring them to lower
their debt and improve their financial ratios (World Economic Forum, 2021). Evergrande failed to
meet these requirements and was restricted from issuing additional bonds or taking out new
loans. Several warning signs of Evergrande's potential collapse emerged in previous years.
According to the Wall Street Journal, the company had a debt-to-equity ratio of 491.73 in 2020,
significantly higher than the industry average of 240%. Additionally, it struggled to cover its
interest expenses, with an interest coverage ratio of just 0.83 in 2020, well below the industry
average of 3.5. The company also experienced negative cash flow from its core operations, with
a deficit of 12.2 billion Yuan (about $1.9 billion) in 2020 compared to a positive 110.1 billion Yuan
(about $17 billion) in 2019. Furthermore, multiple credit rating downgrades from major agencies,
including Fitch lowered its rating from BB+ to BB- in 2020 and Moody's lowering it from B2 to Ca
in 2021, both well below investment grade.

Evergrande is being compared to Lehman Brothers because both are large, influential
companies facing debt crises and potential defaults. But they are different because Evergrande
is a real estate company, while Lehman Brothers is an investment bank. Evergrande's issues
mainly impact local investors, creditors, suppliers, and homebuyers, who may be more open to
negotiation (Oi, 2021). In contrast, Lehman Brothers' debt was spread globally, causing major
losses and global financial panic among international investors (Povey, 2021). As the fate of
Evergrande unfolds, its financial struggles and the potential consequences remain a matter of
significant concern within the global financial landscape.

THEORIES TO CONSIDER
Crisis Management Theory

This theory illustrates how organizations prepare for, respond to, and recover from
unexpected and disruptive events that challenge their goals and performance. According to
Marker (n.d.), crisis management involves four phases: prevention, preparation, response, and
recovery. In each stage, the organization should perform specific tasks and activities, such as
identifying potential crises, conducting risk assessments, forming crisis teams, developing crisis
plans, implementing crisis actions, communicating with stakeholders, evaluating crisis outcomes,

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and learning from crisis experiences (Zamoum & Gorpe, 2018). The crisis management theory
helps organizations deal with the uncertainty and complexity of crises to minimize negative
consequences and maximize positive opportunities.

Asset/Liability Management Theory

The theory of asset/liability management focuses on the timing of cash flows due to the
need for company managers to prepare for liability payments. This process aims to guarantee the
availability of assets for the prompt settlement of debts and the capability to convert assets or
earnings into cash when needed. (Banton, 2020). Furthermore, as highlighted in the Corporate
Finance Institute article, ALM is a collaborative process that employs frameworks to monitor an
organization's entire balance sheet. Its primary objective is to ensure that the assets are properly
invested and minimize long-term liabilities.

Stakeholder Theory

Stakeholder theory holds that a company's long-term survival depends on delivering value
to all stakeholders. This theory comprises three fundamental elements: identification, analysis,
and engagement. Identification means finding and categorizing stakeholders, such as customers,
employees, investors, and regulators. Analysis means evaluating and prioritizing stakeholder
needs and expectations, as well as their power, interest, legitimacy, and urgency. Engagement
means communicating, collaborating, and addressing stakeholder concerns and issues (Jp,
2022). By following this theory, companies can balance and harmonize stakeholder interests and
values, leading to better performance, sustainability, and reputation, especially in complex and
uncertain situations.

EXPECTED OUTCOMES
The purpose of this case study is to evaluate the tactics and comprehensive reactions
implemented by various stakeholders, including real estate developers such as Evergrande,
regulatory organizations, and the government, in the aftermath of the Evergrande crisis in
China. The study seeks to establish if these solutions are adequate in addressing the crisis,
minimizing its impact, and facilitating the long-term functioning of firms in China's real estate and
associated sectors.

SHORT TERM OBJECTIVES

 Main Objective: To stabilize the situation and stop a spreading financial catastrophe in
order to lessen the immediate effects of the Evergrande crisis on the world economy.

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  Specific Objective:
1. Assist Evergrande and its creditors negotiate a debt restructuring solution that
is advantageous to both parties and prevents default.
2. Implement actions to keep the Chinese real estate market from experiencing a
larger decline, minimizing harm to associated markets and industries.

LONG TERM OBJECTIVE

 Main Objective: To strengthen the global financial system and make it more stable and
resilient so that it endures crises like this in the future and lessen the global economy's
exposure to systemic shocks.
 Specific Objective:
1. Encourage international regulatory reforms to improve the transparency and
supervision of the real estate and finance sectors and stop businesses like
Evergrande from taking unnecessary risks.
2. To lessen the impact of future crises on the global economy, create a
framework for coordinated responses to financial crises involving international
institutions and governments.
3. Establish methods for early detection of systemic threats, allowing for timely
measures to prevent crises from growing.

GAME PLAN
ACA 1: (Systemic Risk, and to prevent contagion)

To lessen the impact of the Evergrande problem on the world economy, the Chinese
government, financial institutions, and other authorities should coordinate their plans to support
their policy responses to the crisis. This might entail taking steps to help Evergrande financially,
Monitoring and assessing the situation to identify potential risks and vulnerabilities., and
preventing contagion to other companies and economies.

PROS CONS
This would make it possible to address the Given the diverse interests and goals of various
situation in a way that is more thorough and nations, it might be challenging to organize an
efficient. international response.

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 It can help to prevent contagion to other Creating and putting into effect a global plan
companies and economies. might take some time.

It would be a clear indication to the markets that  It might not be able to stop all of the negative
everyone is working together to contain the issue. consequences of the crisis.

ACA 2: (Debt restructuring, asset sale)

Evergrande could sell their assets and other investments to have cash to pay its debt This could
include land, buildings, or other investments, after that they can negotiate with its creditors to
reduce the amount of debt it owes and extend the repayment schedule, to give Evergrande
more time to improve its financial situation and to pay off its debts

PROS CONS
It would allow Evergrande to avoid a default  It may be difficult to reach agreement with all
and its associated consequences. of Evergrande's creditors.

 It would protect the interests of creditors, It could require compromises from

investors, and customers. Evergrande, such giving up ownership of
some of its assets.
Debt restructuring  Evergrande's debt may not be able to be
restructured in a way that is long-term
sustainable.

ACTION PLAN
Chosen Alternative Courses of Action:

Evergrande could sell their assets and other investments to have cash to pay its debt.
This could include land, buildings, or other investments, after that they can negotiate with its
creditors to reduce the amount of debt it owes and extend the repayment schedule, to give
Evergrande more time to improve its financial situation and to pay off its debts

Step-by-Step Execution

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Although bankruptcy is a costly and complicated process, selling assets and reorganizing debt
may be an option for businesses that are having serious financial problems. Evergrande could
raise money by selling investments, real estate, or other assets in order to pay off its debt. The
business might then bargain with its creditors to lower the debt balance and lengthen the
payback period. Evergrande would have more time to improve its financial status and pay off its
debts as a result.

So here our step-by-step execution:

Step 1: Identify and evaluate the company's for-sale assets, Evergrande should list all of its for-
sale assets. This could comprise non-core enterprises as well as real estate, PPE, and other
investments. The worth of these assets and the potential effects of selling them on Evergrande's
business operations should both be evaluated.

Step 2: Create an asset sales strategy, after deciding which assets to sell, Evergrande should
create an asset sales plan. The precise assets that will be sold, the intended buyers, and the
timing of the sales should all be included in this strategy.

Step 3: Discuss your debt restructuring plan with your creditors. Evergrande should talk to its
creditors about its debt restructuring plan. This Plan shall specify the amount of Debt to be
reduced by Evergrande, the new Repayment Schedule, and any other suggested modifications
to the Debt Agreements.

Step 4: Negotiate with creditors, Evergrande must enter into negotiations with its creditors in
order to come to an agreement on the debt restructuring plan. Although it may be challenging
and drawn out, this negotiating procedure is necessary to make sure that Evergrande has a
manageable debt load and that its creditors are protected.

Step 5: Execute the asset sales and debt restructuring plan. Once Evergrande has reached an
agreement with its creditors, it can execute the asset sales and debt restructuring plan. This will
involve selling the identified assets and using the proceeds to pay down debt and/or restructure
the remaining debt.

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 REFORMS TOWARDS SUSTAINABILITY OF THE GAME PLAN

The game plan is driven by what must be prioritized in order to solve the Evergrande
challenge. To ensure the strategy’s long-term success, the game plan outlines a beneficial
strategy for the long-term integration of the Evergrande crisis. To thoroughly examine and identify
potential financial risks, as well as how to deal with unfavorable financial results, the organization
must engage in financial risk management that will also help Evergrande quantify a better risk
management plan. One crucial factor in keeping Evergrande Real Estate Group in the industry is
proper resource allocation. It is critical for China Evergrande Group to liquidate assets in order to
raise funds and pay its debts in order to continue operations. After developing a strategy for the
company's for-sale assets, it is critical to improve the company's cash on hand and boost the
possibilities of doing things more advantageously for the Evergrande Real Estate Group.

Furthermore, transparency builds trust among investors, customers, and other

stakeholders while safeguarding the company's reputation. It encourages greater stakeholder
engagement and continues to work proactively to restore trust in them. Rebuilding ties among
stakeholders will help them stay in the business. Debt restructuring will result in substantial mid-
to long-term growth potential for Evergrande, giving it time to improve its financial situation and
pay its obligations. Identifying and determining criteria is also necessary for a concrete and
successful debt-free approach.

INTEGRITY IMPACT

The chosen alternative action can improve the existing management in maximizing the
utilization of the resources and capabilities of Evergrande in the future. Evergrande can integrate
more focused strategies in monitoring and evaluating the risk to improve and take a significant
move in order to avoid contagion to other companies and economies. This game plan's influence
can be applied to Asset/Liabilities Management Theory, which depicts the process of controlling
an asset's cash flow and decreasing risk in order to avoid future liability default. It underlines that
assets can cover liabilities if the conversion of assets or earnings into cash is perfectly timed.
Evergrande must monitor and assess its whole balance sheet to ensure that assets are

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appropriately invested and long-term obligations are minimized (Banton, 2020). This theory will
sustain and strengthen Evergrande's management's ability to successfully lead and build strategic
planning, as well as focus on their capacity to borrow money and generate work efficiency inside
the company to accomplish growth chances.

The notion of crisis management can also be used to support Evergrande’s game plan,
which is divided into four phases: prevention, preparation, response, and recovery. To ensure the
success of the game plan and to minimize potential risks, Evergrande should create monitoring
and identifying potential dangers. Evergrande management will inform its stakeholders about the
new strategies and review the results to change them as needed. For the recovery stage, learning
from the previous experiences of Evergrande the company will make more intelligent decisions
and manage money effectively for we'll operation and liability reduction. Crisis management can
help an organization develop in the future. It is yet another option for Evergrande to appropriately
respond to any issues and limit the negative implications that the company is currently facing.
Crisis management theory will allow the Evergrande to significantly bring back their credibility to
attract positive opportunities to with creditors, investors, and customers to protect them to
disruptive events that challenge their goal and performance (Gonzalez & Pratt, 2020).

TRANSFORMATIVE IMPACT TO MULTI-STAKEHOLDERS

Since Evergrande is one of the largest real estate developers in the world and has the
highest property sales in China, it will have resulted in multiple positive impacts on the multi-
stakeholders as it plays an essential role in the success of the company at every stage where it
engages in real estate development, investment, operation, and construction. Every business
needs to be aware of their status, especially if they find themselves in a situation where they may
need to cease operations because they are not providing their customers with the right service or
are going through a crisis. In line with this, the proposed game plan of debt restructuring and
asset sale analysis will determine how to have options, improve its financial status, and pay off
its debts.

In relation to Evergrande's problem, managing numerous challenging internal challenges

in the real estate development industry as a whole has required the participation of multi-
stakeholders. They concentrate on methods for stimulating knowledge creation, enhancing
interactions between multiple administrative sectors and a wide range of fields, and, most
significantly, enhancing policymaking. By identifying and assessing the company's assets that

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may be put up for sale, which can have a significant impact on many parties, this can solve the
issue of strengthening a complete network through a debt crisis-related collapse that can be
prevented. It is crucial to evaluate the worth of these assets as well as the possible effects of
selling them on daily operations. The specific assets that will be sold as well as the timing of the
sales should be considered in this approach. Additionally, when negotiating with creditors,
multiple stakeholders can include the proposed debt reduction amount, the new repayment
schedule, and any other modifications to the debt agreements. Even though it could be difficult
and time-consuming, this negotiation process is necessary to ensure that it has a manageable
debt load and that its creditors are secured. The multi-stakeholders can generally implement the
plan for asset sales and debt restructuring after coming to an agreement with their creditors. In
most cases, the multi-stakeholders would establish specifically designed interactive processes
that gather a variety of stakeholders to take part in their plans for potential future challenges
and/or the execution of activities to address the shared concern and accomplish their economic
aim.

YIELDS AND INSIGHTS

Real estate plays a significant role in the Chinese economy, contributing about a quarter
of its GDP and having an impact on a number of associated industries. For Chinese citizens and
municipal governments, real estate is a key source of revenue and wealth. Evergrande, one of
the biggest real estate developers in the world and based in China, was caught in one of the
biggest crises in its history. The Chinese government, which has tightened real estate laws to limit
excessive borrowing, speculation, and rising house prices, was putting increasing pressure on
the company. Some developers were subject to the "three red lines" legislation in 2020, which
mandated that they reduce their debt and enhance their financial ratios. Evergrande had to refrain
from issuing more bonds or taking out new loans since it didn't fulfill these conditions. Since
numerous signals of Evergrande's approaching collapse occurred in prior years, Evergrande was
undoubtedly experiencing failure.

Having knowledge of whether your company needs short-term or long-term financing will
help you make decisions about sustainability. And given the circumstances that Evergrande is
currently in, it is important to master the four stages of crisis management theory early on. Four
stages are responsible for crisis management: prevention, planning, response, and recovery.
Each stage of the process requires the organization to perform certain tasks and activities, from

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identifying possible crises to learning from crises. Evergrande could benefit from having more
time to strengthen its finances and settle its obligations if this principle applied early on. However,
a crisis is an unanticipated process or occurrence, and it really can harm an organization in its
entirety or merely a portion of it, risking its citizens, creating financial loss, or damaging the
reputation of the company. Understanding what crisis management is requires first understanding
what a crisis is and how it impacts a company.

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References:

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Investopedia. https://www.investopedia.com/terms/a/asset-liabilitymanagement.asp
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