The potential for Chinas Evergrande Group to finally go bankrupt is still high despite recent progress made in selling assets and paying down debts, analysts and commentators say.

The Shenzhen-based property developer saw its contracted sales collapse by about 90% year-on-year in September and October, the traditional high sales season for Chinese property markets.

The company also suffered from a property market down cycle where 21 lower-tier cities, where most of Evergrandes property projects are situated, announced market-intervening measures last month to limit price reductions. Those caps are reportedly contributing to Evergrandes cash-flow problems by reducing its ability to slash prices to facilitate sales.

At the same time, a 2.8 billion Evergrande share stake worth about US$1 billion, appeared in Hong Kongs Central Clearing and Settlement System (CCASS) last Friday, indicating that company chairman Hui Ka-yan may be pledging part of his stake as collateral for loans, media reported.The stake was reported to CCASS by Haitong International Securities Co.

Hui and his wife own more than 76.69% of Evergrandes outstanding shares. On October 8, Hui, through Xin Xin (BVI) Limited,pledged 500 million Evergrande shares to a third party by providing share rights as a guarantee to persons other than qualified lenders. On October 12, Haitongs CCASS holdings in Evergrande increased by 500 million shares.

Evergrande has faced a liquidity shortage since its plan to go public in Shanghai was scrapped last year. Chinese financial regulators also announced three red lines to forbid heavily indebted property developers from borrowing money from banks until they lower their gearing ratios.

With worse-than-expected contract sales in the first half, Evergrande failed to pay for the construction of many of its real estate projects. The suspension of construction sent Evergrande into a vicious cycle in which the company could not generate revenue to pay creditors and holders of its wealth management products.

Between September 23 and October 11, Evergrande failed to pay interest of $276.5 million to global investors who hold its bonds. The company finally made payments by the end of the 30-day grace period to avoid an immediate default. It was reported that Hui settled the payments with his own funds.

Evergrande will be removed from the Hang Seng China Enterprises Index (HSCEI) from December 6, according to a statement released by the Hang Seng Indexes Co Ltd, a wholly-owned subsidiary of Hang Seng Bank, last Friday.

On November 17, Evergrandes weighting in the HSCEI was only 0.07%, compared with Meituans 9.41%, Tencents 8.47% and Alibabas 7.98%. Evergrandes shares fell 1.08% at HK$2.75 on Monday. They are down 83% from HK$16.28 a year ago.

Meanwhile, credit rating agencies continue to issue warnings. S&P Global Ratings said in a recent research report that Evergrandes debt crisis had not yet ended and that the bigger test would come when $3.5 billion comes due for US dollar-denominated notes in March and April next year.

We still believe an Evergrande default is highly likely, said analysts at S&P Global Ratings. The firm has lost the capacity to sell new homes, which means its main business model is effectively defunct. This makes full repayment of its debts unlikely.

On September 3, Evergrande said its contracted sales decreased 26% to 38.08 billion yuan ($4.89 billion) in August from a year ago. It said its August sales included amounts offset through the sales of property units to suppliers and contractors.

In the first eight months of this year, the companys contracted sales fell 2.7% to 438.65 billion yuan from the same period in 2020.

Although the company did not announce its contracted sales in September and October, it could have only generated revenue of 17 billion yuan in September and 2.9 billion yuan in October from property sales, according to China Index Academy, a Beijing-based real estate data provider. The combined revenue in the two months was down 89% from the same period of 2020.

Last month, Evergrande tried to replenish its foreign exchange by offering to sell its Hong Kong headquarters building in Wan Chai district to Chinese state-owned Yuexiu Property for $1.7 billion. But Yuexiu Property pulled out of the deal, fearing that Evergrandes debt problems would undermine the transaction.

On October 20, Evergrande said it had scrapped its plan to sell a 50.1% stake in Evergrande Property Services Group to Hopson Development Holdings. The deal, if it had gone through, could have provided Evergrande net cash of HK$20 billion ($2.57 billion) on October 12.

On November 16, China Business News, or Yicai.com, reported that Hui had personally injected 7 billion yuan into his company since July 1. The report said that Hui had already sold three luxury apartments in Hong Kong and several private jets, and planned to sell two more luxury flats in Shenzhen and Guangzhou.

On the same day, the company announced that it had agreed to sell all of its remaining 18% stake in HengTen Networks Group, which operates an online video platform, for HK$2.13 billion, or HK$1.28 per share, to a company owned by mainland investor Li Shaoyu. The selling price represented a 24% discount on the closing price of the Hong Kong-listed HengTen on November 17.

Prior to this, Evergrande had already sold a 19.55% stake in HengTen for HK$4.37 billion. Shares of HengTen had gained 72% to close at HK$2.9 on Monday from November 17.

On November 20, Yicai.com, a Chinese financial news media, said more and more lower-tier Chinese cities were facing a down cycle in their property markets.

Since October 12, at least 21 local governments in third and fourth-tier cities, including Shenyang and Kunming, have launched new measures to forbid property developers from cutting their selling prices by more than 15% from market levels. When selling flats in the same building, developers are not allowed to cut prices by more than 5% from the previous quarter.

Zhang Bo, chief analyst at 58 Anjuke Institute, a research unit of the property marketplace Anjuke.com, said property prices in lower-tier cities had fallen rapidly in recent months, forcing local governments to limit price cuts. Zhang said many local property developers wanted to replenish their cash flow by offering discounts to homebuyers, creating a huge price pressure on the markets.

Zhang added that some property developers paid their contractors in property units due to a lack of cash. He said these contractors then sold these apartments to homebuyers at big discounts, adding more price pressure on the markets. Fortunately, he said, these price pressures had not yet spread to the first and second-tier cities.

It is still unclear whether Evergrande would be able to boost its contracted sales or sell more assets in the coming few months. On October 22, Hui said in an internal meeting that the companys annual property sales would be gradually reduced to 200 billion yuan within the coming decade from 700 billion yuan in the past.

He said Evergrande would allocate more resources to its e-vehicle businesses in the next 10 years.

Read: Evergrande staves off default with dollar bond payment

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Evergrande's bankruptcy still just a matter of time - Asia Times