This Aug 20, 2016 photo shows a logo of China Evergrande Group on a high-rise office building in Shenzhen, South China's Guangdong province. (PHOTO / IC)

Heavily indebted mainland developer China Evergrande Group warned on Tuesday that contracted sales could drop significantly in September, putting tremendous pressure on cash flow and liquidity.

The company’s shares had tumbled by 11.87 percent to close at HK$2.97 (US$0.38) on Tuesday.

In a filing to the Hong Kong Stock Exchange, the company also repeated a warning that it could default on debt, while flagging the consequences of such an event.

Cash flow measures the cash generated by a company and it may refer to EBITDA, operating cash flow, or free cash flow.

China Evergrande said that considering the difficulties, challenges and uncertainties in improving liquidity, there “is no guarantee that the group will be able to meet its financial obligations under the relevant financing documents and other contracts”

Liquidity refers to how easily a company's assets can be converted into cash.

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China Evergrande said that considering the difficulties, challenges and uncertainties in improving liquidity, there “is no guarantee that the group will be able to meet its financial obligations under the relevant financing documents and other contracts”.

If the company were unable to repay debt, this could cause a “cross default”, referring to a possible spreading of the risks.

A cross default “would have a material adverse effect on the group’s business, prospects, financial condition and results of operations”, the company cautioned in the HKEX statement.

China Evergrande said Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited have been brought in as joint financial advisers to evaluate the “group’s capital structure,evaluate the liquidity and explore all feasible solutions to ease the current liquidity issueand reach an optimal solution for all stakeholders as soon as possible”.

The potential sale of an office building in Hong Kong to help ease liquidity issues, has not been successful either.

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China Evergrande said it has explored potential buyers for China Evergrande Center at 38 Gloucester Road, Wan Chai. So far, there has not been any legally binding agreement for a disposal and there “is no guarantee that a disposal agreement will be entered into”. China Evergrande Center is a 25-storey Grade-A office building offering floor space of 200,000 square feet (18,580 square meters).

Contract sales of properties are continuing to drop, the company said in the HKEX statement.

Sales in June, July and August dropped to 71.63 billion yuan (US$11.12 billion), 43.78 billion yuan and 38.08 billion yuan.

The company said that it has been “exploring with potential investors on the sales of part of its interests in China Evergrande New Energy Vehicle Group Limited and Evergrande Property Services Group Limited. 

Late May this year, China Evergrande disposed of 2.66 percent of the issued shares in China Evergrande New Energy Vehicle Group for about HK$10.6 billion. Baker McKenzie, a leading law firm for cross-border transactions, advised on the sale of the shares.

China Evergrande said in its HKEX statement on Tuesday that the group is also considering bringing in new investors and its other subsidiaries.

China Evergrande is estimated to have liabilities of 1.97 trillion yuan.