BUILDING up the second-biggest corporate debt pile in China does come at a cost.

    China Evergrande Group, the nation’s No.2 real estate developer, reported last week that its borrowings grew to US$57 billion by the end of June, including so-called perpetual bonds. Only State-owned PetroChina Co. owes more.

    The crushing impact of that burden became clear in its first-half results as despite reporting a 12.6 percent jump in sales, Evergrande said that income attributable to shareholders slumped 74 percent to 2.46 billion yuan (US$368 million). That was mainly because of a 60 percent rise in payments on the perpetual bonds as well as a surge in marketing costs.

    The aggressive leveraging of Evergrande’s balance sheet by its founder and major shareholder Hui Ka-yan shows that while investors and economists have been largely focused on the mountains of debt being built up by China’s State-controlled sector, the private sector has also been on a borrowing binge, fuelled by the availability of cheap money.

    With a stock market value of just US$8.5 billion, its critics say that Evergrande, which is a household name in China because of its development of many thousands of apartments for middle class buyers, would be rocked badly if there was a major decline in China’s home prices or a further downturn in the Chinese economy.

    “Evergrande’s stretched balance sheet, due to active land purchases, high dividend payments and expansion into new businesses should keep its net gearing at a very high level,” said Bank of America Merrill Lynch analyst Raymond Ngai.

    “We think the stock should trade at a discount valuation, with its high financing risk,” said Ngai.

    For credit analysts, the debt picture appears far from sound.

    “We are concerned about Evergrande’s high leverage and liquidity risks,” said Moody’s analyst Franco Leung.

    It is by no means the first time that there have been alarm bells rung, though Evergrande has also been able to have some of its fiercest critics at least partially muzzled.

    High-profile short seller Andrew Left, of California-based Citron Research, published a report in 2012 arguing the group was insolvent. Evergrande denied the accusations and Left was recently found culpable of market misconduct by a tribunal in a case brought by the Hong Kong securities regulator.

    Left, who declined to comment on Evergrande for this article, says he is considering an appeal.

    Moody’s itself was reprimanded by the regulator and fined HK$11 million (US$1.42 million) for alleged failures in producing a critical report on Evergrande. Moody’s is appealing.

    Evergrande does have its supporters in the analyst community, who see it taking advantage of the troubles faced by rivals in a weaker economy.

    “Evergrande is good at buying land and quickly turning it into cash by selling properties --- so this strategy is a good one. In a sector slowdown, there is lot of room to swallow less efficient players,” said David Ng, Macquarie’s head of Chinese mainland & Hong Kong research.

    Meanwhile, Hui has, if anything, speeded up his debt-fueled purchases in recent years.

    In the past eight months, Evergrande has splurged US$4 billion on banks, construction companies and stakes in rivals. The company also bought 80 plots of new land spread across 57 cities in the first half of the year.

    A lot of the acquisitions are add-ons that the company’s supporters say reinforces its market position, including a supply chain that can stretch from financing to construction and sales.(SD-Agencies)