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New York-listed Eggshell has a great fall

(ATF) Eggshell Apartments was the first Chinese stock to be listed on the New York Stock Exchange in 2020. Touted as China’s leading internet platform for long-term rental apartments, the company, known in English as Danke Apartments, landed on the world’s most famous stock exchange with the stock code “DNK.”

But appears to have been all downhill since that noteworthy day in mid-January, as the company’s business has descended into chaos, and it is referred to in the Chinese media as the “Broken Eggshell.”

The company, which functions as an intermediary between landlords and tenants, has not been paying landlords, which has led to mass tenant evictions – despite the fact that tenants had paid rents to Eggshell.

The Shandong Business Daily broke the news and was contacted by numerous tenants asking for help, as well as employees of Eggshell Apartments who said that they had not paid wages for two months.

Eggshell Apartments operates across China. At one point it allegedly had hundreds of thousands of apartments on its books, but its operations have not been smooth.

Many tenants said they paid annual rents in one payment, but signed what turned out to be a loan agreement, not a tenancy lease. This issue has led to calls for regulations in China’s property rental sector to be strengthened.

2020 has been a bad year for the group and the bad press about problems in this business have now reached a crisis point.

On November 19, China Banking News reported that Beijing municipal government had set up a special team to look into Eggshell/Danke Apartments because of reports it was on the verge of bankruptcy.

On the same day, Caixin reported that the “cash-strapped” company was looking for a buyer because it had a funding shortfall of about 3 billion yuan (US$457 million). It said the company had been mired in financial problems because of the pandemic and a business model that requires tenants to put up “immense sums of cash up front” to fund its rapid expansion.

This publicity led to officials in two of China’s biggest cities taking action this week to remedy alleged abuses that have plagued this industry and caused havoc for tenants, landlords and companies in this business.

Wuhan, Shenzhen seek to calm troubled rental markets

On Wednesday, November 25, the Wuhan Municipal Housing Security and Housing Administration issued an “Emergency Notice on Further Strengthening the Supervision and Management of the Housing Leasing Industry” to bolster the management of practitioners, to standardise the management of information release, strengthen the supervision of business behaviour, and to set up an online signature filing system and a channel where citizens can make complaints.

On the same day, the Shenzhen Municipal Bureau of Housing and Construction issued an “Emergency Notice on the Stabilisation of Eggshell Apartment Tenants”. This noted that various departments “cooperate in doing a good job in stabilising the issues of tenants of Eggshell Apartment.”

Tenants also set up a communication and negotiation platform “to guide landlords and tenants to resolve lease disputes reasonably and legally.” For tenants still within their lease term who have paid rent in full, landlords should “not drive or intensify conflicts through cutting water, power, gas, etc.”

China Finance Magazine explained that companies involved in the long-term rental of apartments such as Eggshell have begun to use tenants’ advance payments and credit loans to obtain funds for expansion.

Eggshell collects rent from tenants in the form of monthly, quarterly, semi-annual, and annual payments, but only settles payments with landlords on a monthly or quarterly basis. It uses the unequal settlement period of “long receipts and short payments” to obtain liquidity. Funds are used to sign more owners and seize more market share.

An Eggshell employee said that in many cities the company does not provide the option for tenants to make quarterly payments – most pay half-yearly or monthly. The so-called monthly payment is actually to guide the tenant to apply for a loan that is repaid by instalments to a bank, after it approves the loan. But payment for the entire rental period is remitted to Eggshell. After that, it collects the tenant’s monthly rent as the principal, and then pays the interest to the bank.

With ‘lower cost money,’ Eggshells quickly entered more cities and signed up more landlords. According to the Eggshell listing prospectus, from 2015 to 2018, the average annual growth rate of its business managing housing apartments reached 359.7%.

At the same time as this rapid expansion, the scale of losses also expanded rapidly. The prospectus shows that the operating loss of Eggshells in 2018 rose to 1.369 billion yuan, and the pre-tax profit margin fell to -51%. The housing rental rate also dropped to 76.9%. The industry-recognised premise for breaking even is if an occupancy rate is 90% or more.

At the beginning of 2019, Ant Financial invested US$150 million to lead the C-2 round of financing for Eggshell Apartments. An early investor in Eggshell Apartments, said after the investment and media promotion of Eggshell, it became an increasingly popular.

With the company growing in leaps and bounds, a rift grew between founders Shen Boyang and Gao Jing. China Finance reported that Shen once wanted to replace Gao Jing’s employees. “After Gao learned the news, he fired all of Shen’s cronies in the company overnight,” it said.

Meanwhile, the insider described Gao Jing as cruel and a “godfather.”

At the end of 2019, with a pre-tax loss of more than 3.4 billion yuan and a total debt of 8.6 billion yuan, Eggshell Apartments submitted its US stock prospectus. The net financing amount of US$128 million (about RMB 840 million) raised on the market is insignificant by comparison.

The rental loan issued at this time in China ‘shall not exceed the 30% limit of rental income,’ which further aggravates the pressure on eggshell’s capital turnover.

Eggshells workers said that after the company went public, Shen Boyang rarely appeared in the company. Now his phone is “dead”, and no one responds on the company WeChat account.


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