Understanding Evergrande, the Chinese Real Estate Conglomerate That’s Nearing Collapse

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, how much do you know about China Evergrande?

Joe Weisenthal (0:22)

So I was gonna start by saying, I think this is gonna be one of the episodes where I sit back and do a lot of listening. I'm excited to participate in it, but I know that it's a very big real estate development company in China, and they've had financial troubles, and that really is about the extent of my knowledge.

Tracy Alloway (0:43)

I have no doubt that you're gonna ask some really interesting questions, but I guess just to introduce the topic, I mean, China Evergrande has sort of loomed large in Asia for a long time, and I think anyone who has any interest in the Chinese economy or Chinese finance has probably heard of the company. I've always described it as the poster child for politically well-connected but over indebted Chinese real estate firms, and I know that sounds like a really niche category, but there are actually a lot of companies that would match that description. But China Evergrande was like the ultimate one of those. It ended up being this really weird mix of a property company, a real estate developer, but it also had a healthcare division, and it also develops its own electric cars, and it also has a mineral water business and theme parks. And the interesting thing about-

Yeah, I was about to mention. And the interesting thing is they've always kind of aligned themselves with the political goals of the Chinese Communist Party. So for instance, I think in 2014, President Xi Jinping made this throwaway comment about how he wanted China to be a force in soccer one day, and he was hoping they would win the World Cup. And suddenly China Evergrande starts splurging on this soccer team and spending millions of dollars on players to fulfill Xi's ambitions. So it's ended up being this really unique company that is very aligned with Chinese political goals.

But what's been happening lately is that it has run into all sorts of financial trouble, to the point that people are talking about the possibility of outright failure or maybe a bailout or some sort of restructuring.

Joe Weisenthal (2:36)

I am very excited about this one. I mean, I think like, like I said, I don't really know that much about it. I assume that my sense is that the frailties of the model have been understood for some time. On the other hand, when you have a company, as many companies in China seem to be, but when you have a company that has such alignment with the government or with the Chinese Communist Party, you have to assume that betting against it is very risky because in theory, there could be infinite bailouts or debt restructurings and so forth.

I feel like I will just, I don't know, I will learn a lot about how everything works from this story.

Tracy Alloway (3:14)

And I gotta say, there's a ton of interest in this at the moment because some people are talking about this as China's Lehman Brothers moment. Although, you know, I personally think it's not gonna go quite that far, but we'll get into it. And I'm really, really excited for this one because we're gonna have on someone who I've been meaning to get on Odd Lots for a really long time, and I just didn't have the right opportunity. But now China Evergrande has come up, and he's really the perfect person to talk about it. He told people to short the stock in 2018, so he's got the call, you know, consistently right for the past three years.

We're gonna be speaking with Travis Lundy. He's an independent special situations analyst who publishes on the Smartkarma platform based in Hong Kong, as am I. And one thing I should mention before we bring Travis on, we are recording this on September 15th. China Evergrande is a really fast-moving story, so a lot could happen between now and when this episode actually gets published. So please keep that in mind.

And without further ado, Travis, welcome to the show.

Travis Lundy (4:23)

Thank you for having me, Joe and Tracy. It's a privilege and pleasure to be here.

Tracy Alloway (4:29)

So I guess my first question is, you know, people have been writing and talking about how strange a company China Evergrande is for many, many years now. I described it as this weird conglomerate involving a bunch of different businesses. I think at last count, it had something like $300 billion worth of total liabilities.