E-House rebuilding hits snag as rights plan stalls

The setback has added new uncertainties to the online real estate agent’s ongoing restructuring 

Key Takeaways:

• E-House’s restructuring has stalled over its inability to use one of its key assets that is currently tied up as collateral for an outstanding bank loan
• The company’s interest-bearing liabilities totaled over 5 billion yuan by the middle of last year

By Lau Chi Hang

The rebuilding has stopped, at least for now, at E-House (China) Enterprise Holdings Ltd. (2048.HK), a former highflier that has become a poster child for the woes overtaking China’s property sector. 

The online real estate services provider was forced to slam the brakes on a plan to raise money through a rights issue late last month, throwing its broader reorganization into question. Time is rapidly running out on the company, which is racing to avoid becoming the next China Evergrande (3333.HK) – a former industry superstar that is now in bankruptcy liquidation after its creditors tired of waiting for a viable plan to recoup some of their money.

E-House is in especially tough straits, having lost 11.6 billion yuan ($1.61 billion) in 2021, another 3.9 billion yuan in 2022, and a further 726 million yuan in first half of last year. Add to that as much as 5.58 billion yuan in loans and convertible notes coming due this year, and its situation looks even more dire.

The company had just 1.18 billion yuan in cash and restricted deposits midway through last year – far short of what it needs to cover its obligations. It also holds another 6.72 billion yuan in receivables, but much of that is considered unrecoverable from the property developers who are its main customers and are facing even greater difficulties.

The assessment from the company’s independent auditor sums up its situation, saying the many uncertainties E-House faces create significant questions about its ability to continue as a going concern.

The same source that once brought the company’s huge success is now behind its huge losses. When E-House went public in Hong Kong in 2018, Chairman Zhou Xin enticed more than 20 developers – who were also some of his best customers – to become his investors, raising HK$4.6 billion ($588 million). That group included three of China’s top property developers, Evergrande, Country Garden (2007.HK) and Vanke (2202.HK; 200002.SZ), along with e-commerce giant Alibaba (BABA.US; 9988.HK). 

What raises the boat can also sink it

At the time of the listing, Zhou had everything all planned out. Bringing on those developers as investors would naturally incline them to giving his company priority in representing their latest projects. As stakeholders entitled to a share of the company’s profits, he figured, they would also be more likely to pay generous commissions and pay their bills on time. 

E-House derives most of its revenue from fees for selling new homes, and boomed when the market was booming. But as things soured, the developers who are its main revenue source have faced difficulty servicing their billions of dollars in debt, making payment of their commissions to real estate agents like E-House a low priority. 

With developers delaying their commission payments, E-House has had to prepare for the growing likelihood that it will never collect much of those debts. As a result, it has struggled to pay off its own debts and other obligations, forcing it to undergo a financial restructuring.

Under a plan announced last April, E-House said it would meet its obligations using a combination of cash and the new shares of TM Home, a joint venture it formed with Alibaba in 2021. 

E-House planned a rights issue that would raise about HK$483 million by selling 12 new shares of priced at HK$0.23 each for every 10 E-House shares held by its existing stockholders. As part of the plan, E-House would inject its CRIC real estate data and consulting service, as well as its online real estate marketing business, into TM Home. 

But a sticking point arose over the status of CRIC, which E-House previously used as collateral for a loan from a Chinese bank. That bank is now refusing to relinquish the collateral status, thus holding back the injection of CRIC into TM Home. As a result, the issue of new TM Home shares as part of the reorganization has also stalled. 

Resolving the impasse

With the rights issue now on hold, E-House has been unable to raise the funds it needs to complete its restructuring. And with a March 31 deadline for finalizing the plan fast approaching, the company is now scrambling to resolve the situation. 

Its top priority now is getting the bank to lift CRIC’s status as collateral for the loan. The company said it received very positive feedback from the bank during initial negotiations to convert the loan from a collateralized loan to a credit loan. But later the bank unexpectedly changed its mind. While we don’t know what caused the change of heart, there may still be hope for the restructuring if that issue can be resolved. 

In fact, E-House has taken out 436 million yuan in loans from the bank, though just 200 million yuan of that is secured by CRIC as collateral. Thus, a repayment of the 200 million yuan could resolve the impasse, paving the way for a resumption of the right issue.

At the same time, the rights issue was only going raise a little over 400 million yuan, which isn’t an astronomical amount. So, even if the rights issue doesn’t proceed, there might be other ways to come up with the cash. But the clock continues to tick down as E-House scrambles for a solution, meaning the deadline will quite likely need to be extended. 

No second chances in real life

During its briefing to discuss its interim results last year, Zhou offered a mea culpa as his company’s top decision-maker and apologized for causing major losses for his investors. He also stressed that he and his company could turn a new page if creditors would just give them a chance.

While there’s no doubt his appeal was sincere, Zhou needs to realize there are often no second chances in real life, and that an opportunity lost to carelessness cannot easily be replaced. Many of his industry bedfellows have learned that lesson in much harder ways. Evergrande founder Hui Ka Yan, also known as Xu Jiayin, is now under investigation as his company faces liquidation. Meantime, Country Garden founder Yang Guoqiang probably regrets not trying to sell his company’s properties more aggressively in 2022 before the current downturn began to accelerate. 

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