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Recently, the debt issue between Evergrande and downstream suppliers has attracted much attention, and many suppliers have even publicly "collected debts" from Evergrande. However, in the past two years, with the exception of large-scale real estate companies like Evergrande facing capital and debt problems, some small and medium-sized real estate companies have had a hard time. For some home furnishings and sanitary ware companies that account for a large percentage of revenue from engineering channels, although real estate engineering channels can quickly increase sales, they may also bring operational and financial risks.

Bankruptcy documents of 165 real estate companies were issued, and 19 of them officially declared bankruptcy

Mr. Kitchen and Bathroom Search through the People's Court Announcement Network, using "real estate" as a key word, and excluding the list of repeated distribution companies and non-real estate companies, and statistics: in the first half of 2021, a total of more than 165 real estate companies issued relevant bankruptcy documents. Among them, 111 real estate companies were ruled by the court to accept applications for bankruptcy liquidation or reorganization; 19 real estate companies declared bankruptcy after their property distribution was completed, or due to insolvency and no possibility of reorganization or reconciliation.

In the first half of 2021, Guangdong is the province with the largest number of bankruptcy documents involving real estate companies, accounting for 18.18%, mainly in Foshan (7), Zhongshan (7), and Guangzhou (6). It is worth mentioning that Zhongshan Anxi Real Estate Investment Co., Ltd. paid off the declared due debts before declaring bankruptcy, and was ruled by the court to terminate the bankruptcy proceedings on March 1, 2021.

These 165 bankrupt real estate companies are mainly small and medium-sized real estate companies. They have previously been involved in contract disputes, financial loan contract disputes, and private lending disputes. At the same time, most of the bankrupt real estate companies have been listed as untrustworthy persons due to non-payment of arrears. For example, Foshan Tianfu Real Estate Co., Ltd. has accumulated 225 records of untrustworthiness so far. The latest piece of information on punishment for untrustworthiness is 553,666.49 yuan involved in a contract dispute.

According to the monitoring of the Zhongzhi Research Institute, from January to May 2021, real estate companies raised a total of 857.748 billion yuan, a year-on-year decrease of 10.15%. The industry's average financing interest rate was 5.69%, a year-on-year decrease of 0.55 percentage points and an increase of 0.29 percentage points from the previous month. The continuous decline in the total amount of financing and the increase in the average financing interest rate indicate that the external financing environment for real estate companies continues to be tight.

In addition, from the new "three red lines" financing regulations that began in August last year to the real estate loan concentration management system, to the ongoing investigations into "operating loans" violations this year, the financial supervision of the real estate industry has been continuously strengthened. Further tightening of approvals has put increasing pressure on financing for real estate companies, especially capital-intensive real estate companies.

*The specific contents of the "three red lines" are: 1. The debt-to-asset ratio after excluding advance receipts shall not exceed 70%; 2. The net debt ratio shall not exceed 100%; 3. The cash short-term debt ratio shall not be less than 1. According to the contact situation, the real estate enterprises are divided into four grades of "red, orange, yellow, and green".

Top-level real estate companies are facing a debt crisis

In the first half of 2021, small and medium-sized real estate companies will suffer, and 100 billion-level and top-level real estate companies are also facing challenges. For example, Tahoe Group, China Fortune Land Development, and Evergrande were exposed to debt crises.

Tahoe Group has been listed as a dishonest person to be enforced since last year. Up to now, there have been 5 records of dishonesty, with a total amount of 724 million yuan involved. According to the announcement issued by Tahoe Group on July 31, as of July 30, 2021, Tahoe Group has matured unreturned loans of 43.693 billion yuan. At the same time, due to debt and other aspects, the bond "H8 Tahoe 01" The principal and interest cannot be paid on schedule. Tahoe Investment also intends to transfer its 19.9% of the company's shares to Hainan Wanyi, but since the conditions agreed upon by the shareholders for the transfer have not been met, the two parties still need to continue negotiations.

The announcement issued by China Fortune Land Development Corporation on July 31 showed that the amount of principal and interest of the newly added debts of China Fortune Land Development Corporation and its subsidiaries that failed to repay bank loans and trust loans on schedule was 8.518 billion yuan. As of July 31, 2021, China Fortune Land Development has failed to repay the principal and interest of the debt as scheduled, totaling 81.566 billion yuan.

News of Evergrande’s recent public debt collection also spread frequently. On June 29, the Sankeshu Paint Company, which has been cooperating for more than ten years, issued an announcement stating that Evergrande’s overdue bills amounted to 51,370,600, and Evergrande responded that the payment was completed that night; on July 19, China Guangfa Bank Yixing Branch applied to freeze Evergrande Real Estate Bank Depositing 132.01 million yuan or sealing up or seizing other equivalent properties, the two parties finally reached a settlement on July 22. In March 2021, Evergrande released its 2020 annual performance report. In terms of debt reduction, interest-bearing liabilities fell from 874.3 billion yuan to 674 billion yuan from the end of March 2020 to the end of March 2021, a sharp drop of 200 billion yuan.

Some large-scale real estate companies are affected by the overall downturn in the real estate environment, and their sales rate has declined. At the same time, due to the large scale of their own debt and the concentration of debt on delivery, they are also facing difficulties in short-term liquidity. If these top-level real estate companies experience a break in the capital chain, their upstream and downstream companies and their subsidiaries will be implicated.

The proportion of bulk business increases, sanitary and home furnishing companies beware of risks

In recent years, with the increase in the concentration of real estate and the advancement of the hardcover housing policy, the importance of bulk business has become more and more prominent. Some sanitary and home furnishing companies spend more financial resources and energy on engineering channels, and their bulk business revenues account for a continuous increase in operating revenue.

For example, Lance Home Furnishing will account for 69.34% of its main business revenue in 2020, reaching about 523 million yuan, becoming an important revenue and profit growth point for the company; Huida Sanitary Ware’s 2020 project channel revenue will be about 820 million yuan Yuan, accounting for 25.75% of the main business income; Wole Home Furnishing bulk business income was 390 million yuan, a year-on-year increase of 61.82%, accounting for 24.61% of the total operating income, driving a substantial increase in the overall profit of the company.

*Lance Home Furnishing Prospectus discloses the revenue of the four major business models for 2018-2020

The expansion of the bulk business scale of sanitary and home furnishing companies is also accompanied by a certain degree of risk. For example, accounts receivable, contract assets, and bills receivable cannot be recovered on time or paid normally, which will bring difficulties in capital turnover or bear the risk of higher financing costs for sanitary and home furnishing companies, and will adversely affect financial conditions and operating results.

According to the prospectus published by Lance Home Furnishing in July this year, China Fortune Fortune had defaulted on debt and failed to repay loans from banks and other financial institutions as scheduled. Lance Household has made a 100% single-item bad debt provision for China Fortune Fortune’s accounts receivable, affecting an amount of 1.96 million yuan.

In addition, Sophia Household has recently used equity transfers to offset claims and debts with Evergrande (including its subsidiaries) in its business activities. The announcement by Sophia Home Furnishing on July 21 shows that the company will transfer 40% of the shares of Henan Evergrande Sophia Home Furnishing Co., Ltd., a subsidiary of the company held by Henan Evergrande Home Furnishing Industrial Park, at a transfer price of 160 million yuan. The 160 million yuan of equity transfer payment was processed by offsetting the claims of Evergrande and/or its subsidiaries with Sophia Home Furnishing, without the need for actual cash transfer payment.

Therefore, before reaching strategic cooperation with real estate developers, some sanitary and home furnishing companies that focus on bulk business (engineering channels) should carefully consider the strength of the other party, and at the same time enhance their own risk control capabilities, and even prepare for bad debts in advance.