Evergrande Auto has acquired a 30% stake purchase, it can assist Evergrande Auto to turn the tables?

On the evening of May 26, Evergrande Auto issued an announcement on the Hong Kong Stock Exchange, disclosing details about a potential share transfer and stating that trading of its stocks will resume on May 27. The announcement revealed that 29% of Evergrande Auto's shares will be acquired, with the buyer providing credit funds to support its electric vehicle business. 

The stocks of Evergrande Auto resumed trading on May 27th, opening with a significant increase of 94.74%. As of now, Evergrande Auto is trading at HKD 0.66, representing a gain of 73.68%.

Last August, Evergrande Auto did not receive the promised investment funds from NWTN. On April 5th, 2024, Evergrande Auto announced that their strategic investment agreement with NWTN had been terminated, leaving their car manufacturing business in deep crisis.

According to Evergrande Auto's announcement on May 26th, it has reached a share sale agreement with China Evergrande Group, Evergrande Health Industry Group Limited, Acelin Global Limited and a third. The third-party buyer has entered into an agreement with the liquidator of China Evergrande and other relevant parties to acquire China Evergrande's shares in Evergrande Auto.

The announcement states that China Evergrande holds approximately 6.347 billion shares of Evergrande Auto, accounting for about 58.5% of its total issued shares, all of which will be potentially sold.

The transaction terms require the immediate acquisition of 3.14 billion potential shares, accounting for about 29% of Evergrande Auto's issued shares. Another approximately 3.203 billion potential shares representing the remaining approximate 29.5% stake will become subject to an exercisable option within a certain period after the purchase agreement date based on third-party buyers' willingness, indicating a high likelihood of future acquisitions. Additionally, as per the non-binding share transfer agreement, the buyer will provide credit facilities to support electric vehicle business development.

If this transaction is successful, the buyer will become a major shareholder of Evergrande Auto. Additionally, if the remaining 29.5% of shares are acquired, China Evergrande will completely divest from Evergrande Auto's operations.

It is worth noting that despite Evergrande Auto's impressive stock performance, the company still faces challenges such as funding shortages. As of December 31, 2023, Evergrande Auto has accumulated a loss of 110.841 billion yuan and produced only 1,700 units of its Hengchi 5. The Tianjin factory has been idle since the beginning of this year with no production resumption.

Even though the savior assisted Evergrande, because of the terrible financial situation caused by its parent company, it faces immense pressure from local governments to terminate cooperation agreements and return incentives and subsidies. 

At the same time, Evergrande Auto is also facing intense competition in the Chinese market. Price wars have been spreading since early last year, with an increasing number of new products and rapidly improving features. Even if Evergrande Auto resumes operations now, its future prospects are difficult to predict positively. Moreover, Chinese consumers find it challenging to regain trust in a brand that has previously gone bankrupt. Unless there is a special emotional attachment, they are highly likely to no longer consider using the Hengchi Auto brand.

In general, Evergrande Auto is currently facing severe challenges in its financial situation and operations. This equity transfer should be seen as an effort to develop the company and revitalize its assets. However, overcoming the crisis depends on comprehensive debt restructuring, business recovery, and market conditions. Moreover, with limited resources from before, it is indeed difficult for Evergrande Auto to break through the current situation.

Translator：Wei Xiong