Recently, the debt issue of Evergrande has aroused market attention. According to the Hong Kong Economic Times, Evergrande recently notified two banks to suspend the payment of loan interest due on September 21. Since the beginning of this month, Evergrande has postponed the payment of trust funds to a number of companies including CITIC Trust, Everbright Xinglong Trust and a Hangzhou trust company. As soon as the news came out, the market was in an uproar.

Real estate companies are important customers of large-scale business channels for home furnishing companies. What are the impacts on home furnishing companies when they have a debt crisis? How should home furnishing companies adjust?

When home furnishing business debt collection is in progress

Data show that as of the end of June this year, Evergrande announced cash and cash equivalents of 86.7 billion yuan ($13.4 billion), while total borrowings were 331.7 billion yuan ($51.3 billion). It is understood that Evergrande has bond debt relationships with Piano, Nature Home, Sogal, and Oppein Home.

In 2017, the home furnishing industry blew up, and many real estate companies entered the home furnishing industry to start a win-win cooperation model. In the same year, Evergrande took the lead in setting up a large home furnishing alliance industrial park project by many home furnishing companies such as Sleemon, Nature Home, Jiangshan Oppein, Simon Electric, Nippon Paint, etc., with a total investment of 10 billion yuan. Set up a joint venture company with a 40% share and a 60% shareholding by a home furnishing company. In the past four years only, in order to repay debts, Evergrande has transferred 40% of the equity of the joint venture to some home furnishing companies to offset each other' s claims and debts.

On July 20, Sogal said that the company had transferred 40% of the shares of the company jointly established with Evergrande at a price of approximately RMB 160 million; The transfer price of 40% equity of the established company was RMB 79.2 million; on September 10, Nature Home also accepted Evergrande' s debt repayment in the same way. The same situation also happened to companies such as Sleemon and Jiangshan Oppein. The 900 million yuan debt of 3TREES and Evergrande was used to repay 220 million yuan in futures.

On September 6, 3TREES issued the Verification Report on the Verification of Letters Concerning Issues of 3TREES Coatings Co., Ltd. Report Letter, which fully explained the cooperation and capital exchanges between the company and the above-mentioned real estate enterprises in recent years.

The announcement disclosed that from 2018 to 2020, Evergrande was the largest customer of 3TREES, with a cumulative sales amount of 1.254 billion yuan, most of which existed in the form of notes and accounts receivable, totaling about 9 100 million yuan. As of August 31, the overdue amount was 336 million yuan. Except for the 220 million yuan used to repay the debt and 15 million yuan in cash, the remaining 95 million yuan has not been recovered.

Sleemon also wrote in a survey summary, “We now also hold commercial papers from some real estate companies. If there is no way to redeem in the future, we will also consider taking back 40% of the equity in the joint venture." The balance of the votes has exceeded 200 billion yuan, and the chance of Sleemon' s recovery is slim, or it may be forced to accept the same debt repayment methods as Sogal, Piano and other companies, or accept real estate companies to repay debts with forward houses like 3TREES.

As we all know, off-plan housing often means the realization time is around a few years. From the fact that home furnishing companies passively accept large-amount futures to repay debts, it can be seen that the solvency of some real estate companies has declined significantly, and home furnishing companies are also quite implicated.

Business is implicated, performance decline

In addition to facing a debt collection crisis, home furnishing companies have also been affected in terms of performance.

In 2017, the custom home furnishing industry blew up. Many real estate companies have deployed the home furnishing industry, and they have begun business binding with home furnishing companies. At present, many real estate companies are locked in by the "three red lines", and the performance of many home furnishing companies is also showing a downward trend.

The typical case is DIOU Home. According to its financial report data, Diou Home's revenue in the second quarter was 1.97 billion, an increase of 3.07%, which was a significant drop from the 46.16% growth in the first quarter. The gross profit rate also showed a sharp decline, and the accounts receivable reached 33.76. 100 million yuan. Diou Home Furnishing is the deepest bound real estate company among the three leading ceramic tile companies and the largest proportion of revenue. This semi-annual report did not meet expectations or it was due to Diou Home' s over-reliance on real estate companies.

Another example is Yangzi Floor. The company' s 2020 annual report shows that its annual revenue is about 516 million, of which the sales to a real estate company, the largest customer, is 103 million, accounting for 20.01%. In the first half of this year, Yangzi Floor had a revenue of 229 million and a net profit of only 14.19 million. The analysis of its asset-liability structure showed that the company' s bills receivable amounted to 136 million, and accounts receivable amounted to 161 million. Inferring from the proportion of sales, real estate companies accounted for the majority of these two receivables.

On September 9, Yangzi Floor issued an announcement stating that due to the overdue payment of the commercial acceptance bills of the company' s largest customer, it seriously affected the company' s continued operations and profitability. Based on the current status and future strategic planning considerations, and re-evaluating the capital market path, the company has carefully studied and prudently decided to terminate the application for the public issuance of stocks to unspecified qualified investors and listing on the selected level, and withdraw the relevant application materials .

Compared with the "behemoth" of real estate companies, home furnishing companies generally lack the right to speak in cooperation. With the decline in solvency of some real estate companies and the lengthening of payment cycles, home furnishing companies, especially small and medium-sized enterprises, encounter difficulties in their operations and become helpless. 

Open up new business

The so-called being prepared for danger in times of peace, many companies have begun to find new business paths, or shift their focus to propose a small B strategy.

In 2020, Diou Home began to untie the hardcover business of real estate enterprises, focusing on small B-end customers. In the first half of 2021, small B channel revenue increased by 45.1%. In the first half of 2021, the operating cash flow of Diou Home improved significantly, regardless of the amount of inflow, or the net amount, the second quarter reached a record high.

In the beginning of 2021, Homekoo announced a comprehensive transformation and renovation. In a way of raising no more than 534 million yuan, JD.com was introduced as a strategic investor to jointly build a self-contained supply chain Internet platform; Oppein Home launched on April 16 this year. Japan signed a cooperation agreement with SD Home Decoration to jointly promote the development of complete decoration. In the first half of the year, the cumulative number of orders for Oppein Home exceeded 1 billion, a growth rate of over 160%; Sogal reduced the positioning of the main brand this year and adjusted it to "cabinet" "Customization Expert", its subsidiary Simi officially enters the custom home furnishings, and at the same time vigorously develops sub-brands such as Milana and Huahe Wooden Door.

From all indications, home furnishing companies are constantly exploring new development paths to prevent large-scale business risks. In addition, the rise of the "small town economy" in third, fourth, and fifth-tier cities is also an opportunity for home furnishing companies.