Is Beleaguered China Evergrande the Ultimate Do-or-Die Value Play?

Everyone hates bailouts — until you need one, that is. Real-estate conglomerate China Evergrande (OTCMKTS:EGRNF) could certainly use some assistance right about now, as could investors in EGRNF stock.

An Evergrande (EGRNF) office in Shenzen, China.
Source: hxdbzxy / Shutterstock.com

The stock has lost much of its value over the past several years, down 84% in the last 12 months alone. Knowing this, it might be tempting for the shareholders to simply cut and run.

Yet, perhaps we can look at EGRNF stock through a contrarian lens. Is it too toxic to buy… or too cheap to ignore?

To get closer to an answer, we’ll apply an old-fashioned valuation metric that might shed some light on Evergrande’s intrinsic value. And even beyond that, we might actually glimpse a light at the end of this long, dark tunnel as a Chinese icon struggles for survival.

Closer Look at EGRNF Stock

If you own a stock and it runs from 70 cents to $4, please consider taking profits.

As the rather macabre old market saying goes, pigs get slaughtered. EGRNF stock rallied to $4 in October 2017, and anyone who chased the stock at that price was severely punished.

Fast-forward to early 2021, when the Evergrande share price was hovering near $1.75. At that time, China was generally managing well in the wake of the Covid-19 pandemic. The global semiconductor shortage hadn’t taken its full toll yet, and the economy seemed to be getting back on its feet.

What could possibly go wrong?

For Evergrande and its shareholders, at least, a whole lot could go wrong. From late January through the end of October, EGRNF stock lost the majority of its value, eventually landing at 30 cents a share.

Here are two pieces of good news, though. First, Evergrande pays out a forward annual dividend yield of 7.65%. So, that should soften the blow somewhat.

Furthermore, Evergrande’s trailing 12-month price-to-earnings ratio is just 1.63. Now, that’s what I’d call an ultra-low valuation, and possibly an irresistible bargain.

The Company That Wouldn’t Die

Some folks will look at that low valuation, and claim that it deserves to be that low because Evergrande is in real trouble.

There’s no denying that the numbers look bad. Evergrande has the dubious distinction of being China’s most-indebted developer, with total liabilities of around $300 billion.

Much of that debt is owed to the company’s bondholders. Evergrande skipped an interest payment that was due on Sept. 29, thereby fueling the pessimistic arguments of skeptics who would predict the company’s demise.

Notwithstanding, the company is still standing. Evergrande recently posted a last-minute $83.5 million bond-debt payment, followed by a separate $47.5 million coupon payment to the company’s bondholders.

Hence, the reports of Evergrande’s impending death were greatly exaggerated (if I may loosely borrow from Mark Twain).

Only time will tell whether the company will continue to successfully pay its debts. Given the extreme decline in EGRNF stock, though, it’s entirely possible that the worst-case scenario has already been priced in.

Too Big To Fail?

It’s also conceivable that Evergrande will get a bailout from the Chinese government. That event, if it happens, could mark a turning point for the company’s stakeholders.

Of course, there are plenty of observers who doubt that the Chinese developer will get a bailout.

After all, China doesn’t seem to have the “too big to fail” culture that America has, wherein the government is ready and willing to rescue giant businesses.

Still, I wouldn’t discount the fear of “Evergrande contagion,” in which the financial fallout of allowing Evergrande to fail would have ripple effects on both the Chinese and the global economies.

Sure, it’s just one company, but its impact is far-reaching. Keep in mind, Evergrande employs around 200,000 people, and indirectly helps to sustain over 3.8 million jobs each year.

Moreover, Evergrande reportedly owns over 1,300 projects throughout more than 280 Chinese cities. Even beyond that, the company has interests in sports and theme parks, electric vehicles and a food-and-beverage business.

Clearly, the Chinese economic ecosystem is intertwined with Evergrande.

Besides, as the Economist Intelligence Unit’s Mattie Bekink points out, “Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms,” which implies further negative impact if the company simply ceased to exist. Arrears to subsidiary companies, like Evergrande Property Services, were highlighted earlier this week in a Wall Street Journal article covering Chinese property management firms.

The Bottom Line

Admittedly, Beijing’s bureaucrats may continue to take a tough stance against Evergrande.

Also, the company might not be able to pay off the remainder of its debts.

Again, though, these unhappy endings appear to have been priced into EGRNF stock.

If anything good happens from here on out, prepare for a potentially violent relief rally — and a closing of the window of opportunity in a viciously beaten-down stock.

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Read More: Penny Stocks — How to Profit Without Gettting Scammed

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


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