China Evergrande Group’s debt-fuelled expansion spree shows no signs of slowing down. Even as soaring interest payments and marketing costs ate into first-half profit, a top executive at the Chinese developer said on Aug 30 that the company wants to acquire brokerage and trust companies as well as smaller rivals — deals that would add to about US$6 billion ($8.19 billion) of purchases since the start of 2016. Evergrande, which made a surprise entry in August into the bidding war for the country’s largest homebuilder, China Vanke, also signalled it may invest in other listed companies.

Billionaire chairman Hui Ka Yan’s strategy of debt-funded deal-making has befuddled analysts and left Evergrande with a credit rating that is among the lowest of large Chinese developers. Moody’s Investor’s Service, which in January cut the company’s notes to a “high risk” rank of B3, in July reiterated its negative outlook, citing high leverage.

The earnings report on Aug 30 may do little to allay concerns about its balance sheet, with debt soaring 28% to RMB381.3 billion ($77.87 billion) in the first half and interest payments tripling. The developer says it will also work on expanding its landbank in the second half to meet sales targets, and pursue “cost-effective” ways to add to projects, such as mergers and acquisitions.

Aggressive approach

“Growth wouldn’t have been as high had Evergrande not been aggressive in the last two years,” CEO Xia Haijun told reporters in Hong Kong on Aug 30, referring to the company’s purchases of sites for its landbank. “We would have missed out.”

Evergrande shares slumped 6.9% to HK$5.36 in Hong Kong trading on Aug 31, the most since June 20. The stock has declined 21% this year, compared with an 11% increase in the Hang Seng Properties Index.

The Guangzhou-based developer’s core profit, or profit excluding property revaluations and foreign-exchange losses, fell 23% to RMB7.8 billion in the first half, from RMB10.2 billion a year earlier, according to a statement to the Hong Kong stock exchange on Aug 30. Marketing costs jumped more than 51% as the company said it embarked on nationwide “brand publicity activities”.

The higher costs were offset by surging property sales, with contracted sales jumping 63% to RMB141.8 billion. The developer has pledged to exceed its RMB300 billion target for pre-sales contracts this year, a goal that is the highest among mainland builders amid a turnaround in China’s housing market.

Evergrande’s total borrowings jumped, with long-term debt surging 51%. Leverage would be even higher if the company’s perpetual notes were counted as debt rather than equity — with the amount of notes on issue rising to RMB116 billion from RMB75.7 billion at end-2015, according to the filing.

Perpetual notes, which are bonds with no maturity dates, are usually booked as equity on company balance sheets.

“Despite strong sales, the results were poor in our view, and Evergrande’s balance sheet remains stretched,” Alan Jin, a Hong Kongbased analyst at Mizuho Securities Asia, wrote in an Aug 31 note. The perpetual notes are “essentially debt in our view”, he says.

Including the perpetual notes, net gearing rises to 432%, which will harm shareholder returns, Eric Zhang, a Beijing-based analyst at China International Capital, wrote in a note published on Aug 31. The jump in perpetual notes put a “significant” burden on profitability, he says.

Cash-is-king strategy

The developer pledged to lower its net debt ratio and stabilise its net profit margin, citing what it calls a “cash is king” strategy, by collecting more cash from sales to roll over borrowings if needed. CEO Xia attributes Evergrande’s cash balance of more than RMB210 billion to its ability to collect more from pre-sales. Chinese developers typically begin selling properties while they are under construction and book profits upon completion.

Last year, Evergrande agreed to buy RMB13.5 billion of assets, mostly in mainland China, from New World China Land, as well as the Mass Mutual Tower in Hong Kong for HK$12.5 billion ($2.2 billion), a record for a commercial building in the city.

The firm in April agreed to buy shares in Shengjing Bank and China Calxon Group, before amassing its stake in Vanke. Projects bought from Hong Kong developers made a “huge” contribution in the first half, and the investment in Vanke has already generated returns on paper, Xia says.

“About how to invest in Vanke, we have a clear mind,” Xia says, declining to elaborate, saying that details would constitute inside information.