China Evergrande may tumble, UBS analysts say in 'sell' call

Hong Kong

CHINA Evergrande Group was downgraded to sell by UBS Group AG analysts, who said shares of the world's most indebted developer may lose more than half their value.

UBS cut its rating on Evergrande from neutral on Jan 12, according to a research report led by analyst John Lam and seen by Bloomberg. The bank also slashed the 12-month target price to HK$6 from HK$15.20 set in September. The target is 59 per cent lower than Evergrande's closing price on Wednesday.

UBS expects Evergrande's contract sales to decline by 2 per cent to 707 billion yuan (S$145 billion) this year, according to a separate Jan 6 report on the developer's property management unit. Last week, Evergrande said it aimed to reach 750 billion yuan of contract sales in 2021 - 50 billion yuan lower than the target set by chairman Hui Ka Yan about three years ago.

UBS didn't immediately reply to a request for comment on Thursday. Evergrande said in a written response that the UBS estimate had no factual basis and the company is confident it will reach its 2021 sales target.

Evergrande shares closed 0.1 per cent lower at HK$14.48 on Thursday, the lowest this week.

The UBS report underscores investor concerns that Evergrande's debt-cutting efforts may force it to prioritise cash flow ahead of profitability. Evergrande's deleveraging strategy and tight liquidity may lead to limited growth potential and uncertainty, the bank's analysts wrote.

UBS estimated Evergrande's earnings per share will decline to 1.11 yuan in fiscal year 2020 before rebounding to 1.24 yuan in 2021. That would still be lower than 1.86 yuan in 2019.

On a positive note, the bank said Evergrande would probably satisfy one of three debt requirements imposed by China's regulator by June 30. Developers must meet these "red lines" in order to increase their borrowing, and Evergrande's latest financial figures suggest it breached all three. Adhering to one may mean Evergrande can grow its debt by 5 per cent, according to the proposed rules. BLOOMBERG