The electric vehicle (EV) unit of China Evergrande Group, the debt-laden property developer, is forced to halt some of its new energy vehicle projects after failing to pay its suppliers, according to a stock exchange filing late Friday night.
"In light of the adverse effects on the liquidity of the group, there were delays in payments to suppliers and construction fees in the group's Evergrande Elderly Care Valley and new energy vehicle living projects, which resulted in the suspension of work on certain relevant projects of the group," said China Evergrande New Energy Vehicle Group, also known as Evergrande Auto.
Before the Hong-Kong listed carmaker issued the warning, its share price plummeted 23.37 per cent to close at HK$2.23 on Friday - down 97 per cent from its peak in February. Investors rushed to dump their shares after mainland media reported that some suppliers withdrew from the company's factories in Shanghai and Guangzhou because they did not receive payment on time.
The liquidity crunch of Evergrande Auto marks the latest blow to its cash-strapped parent. Evergrande, the world's most indebted developer, currently has US$300 billion in liabilities, compared with 2.38 trillion yuan (US$369 billion) in assets. Banks and capital markets around the world are on tenterhooks as the Shenzhen-based firm grapples with ways to settle US$120 million in interest payments due this week, 30 per cent of which was postponed in "off-exchange negotiations" with holders of a smaller, onshore bond.
Evergrande Auto, which is developing the Hengchi car brand, also warned there could be worse to come: if it is unable to get fresh capital from potential new investors or asset sales soon, it may not be able to pay employee wages and daily operating expenses.
"(The lack of sufficient capital) will, at the same time, impede the research and development progress of new energy vehicles and have a material adverse impact on the group's mass production of new energy vehicles," the company added.
The group has been seeking additional capital from new investors, with due diligence and negotiations still in progress, said Evergrande Auto. It also wants to sell some of its Elderly Care Valley projects and overseas assets, but no agreement has been made so far.
"It remains uncertain as to whether the group will be able to consummate any such sale," the company said.
Some of Evergrande Auto's rivals may express interest in purchasing the group's assets, said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers.
"While China Evergrande New Energy Vehicle Group has not yet sold any car, it can still attract a buyer for its EV projects as it has already got two licenses to operate two carmaking factories in China," he said. "The other carmakers will be interested to buy in these assets as a short cut to expand their capacity."
Evergrande Auto's warning came less than two weeks after China's minister for industry and information technology said that China has too many EV firms right now and a market-driven consolidation of fragmented players is encouraged.
On Tuesday, Evergrande Auto announced that a total of 323.72 million share options were granted to three independent non-executive directors and around 3,180 employees.
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