China's most-shorted developers of 2017 may foil bears yet again

[SHANGHAI] Two Chinese developers that emerged as favorite targets for short-sellers last year are estimating profits jumped amid record home sales, buoying their shares in recent days.

China Evergrande Group forecast full-year net profit soared between 300 per cent to 400 per cent to a record high in a Thursday filing, citing the redemption of perpetual securities and fewer expenses - two factors that had eroded profit in 2016. Earlier this week, Sunac China Holdings Ltd said net profit probably jumped more than 240 per cent, on revenue that almost doubled and higher gross margins.

The two leading developers, whose rising debt levels attracted bearish speculators last year, benefited from China's red-hot home market that defied stringent property curbs. China's home sales rose 7 per cent to a record last year, while the tighter fundraising environment gave larger developers an edge over smaller rivals.

Shares of Evergrande and Sunac, which slumped earlier this year amid concerns that home buying restrictions would hurt sales, have advanced in the past week to pare some losses. That's come as short interest has climbed again after hitting a low point earlier this year, boding ill for bearish investors.

Evergrande shares rose 5.6 per cent in Hong Kong trading at Friday's close, paring this year's decline to 9.5 per cent. Sunac rose 1.2 per cent, reducing this year's drop to 5.9 per cent.

The higher net profit expected by Evergrande, at about 25.4 billion yuan (S$5.28 billion), reflected "remarkable success" in its shift to a low-debt strategy, the firm wrote in an emailed statement after its earnings update. Credit Suisse Group AG analysts raised their rating on Evergrande shares to outperform in a note Friday, citing its lower gearing.

This year, Sunac will likely maintain "robust" revenue growth, and will improve its leverage, Moody's Investors Service wrote after the developer announced its profit forecast. Rhb Osk Securities Hong Kong Ltd. raised Sunac to a hold rating on March 7.

BLOOMBERG