Short sellers take on top Hong Kong property stock of 2015

[HONG KONG] Evergrande Real Estate Group, the best- performing major property stock traded in Hong Kong this year, is also the most-shorted and lowest-rated among peers.

Some reasons: The developer controlled by billionaire Chairman Hui Ka Yan has bought back shares to help boost prices and has been piling on debt, leading analysts and some investors to bet that increases won't be sustainable. The shares, which defied a slumping market to increase in July and slip only 0.6 per cent amid a rout in August, led declines among property developers in September.

Chinese developers have been taking on debt to expand as the government turned to areas such as property investment to shore up slowing economic growth. As the share market began its decline in mid-June, developers such as Evergrande and China Vanke Co moved to give their shares a boost via buybacks. Evergrande's shares jumped 11 per cent in July as the developer embarked on a buyback spree, and was the only stock in the BI China Real Estate Owners and Developers Valuation Peers Index to increase that month.

"The cash flow position will become quite tight if the company keeps buying back shares or maintaining its dividend payout," Toni Ho, an analyst at RHB OSK Securities Hong Kong Ltd, said. "Evergrande has been more aggressive compared to its peers in terms of taking on more debt." Evergrande's shares fell 1.3 per cent to HK$4.73 (S$0.87) at the close of trading in Hong Kong and was the worst-performing member in the BI China Real Estate Owners and Developers Valuation Peers Index.

Evergrande's secretary, Jimmy Fong, didn't answer two e- mails seeking comment, and three phone calls to his office went unanswered. In August, Fong had said there was nothing new in a report by an independent research firm that highlighted the firm's indebtedness, adding that though the company's leverage had gone up, it was due to its expansion.

Evergrande's shares fell 14 per cent in September, the worst performer among its peers. Still, the company's shares are up about 51 per cent this year, the top performer and one of four stocks to gain in the 16-member BI China Real Estate Owners & Developers Index, which tracks the nation's biggest developers with shares traded in Hong Kong.

Ho said the stock has been supported by the buybacks and because of the developer's strong branding on the mainland, where sales were helped by lowering of interest rates and easing of property curbs. In August, the company reported a 33 per cent increase in net income and 23 per cent increase in sales for the six months ended June from a year earlier. Evergrande spent HK$5.47 billion buying back 1.15 billion shares in July. The company, which has amassed one of the highest debt loads among China's developers, is planning to sell as much as 20 billion yuan (S$4.5 billion) of bonds in the onshore market this month, people familiar with the matter said Wednesday.

The developer's net debt-to-equity leverage rose to a record high of 121.8 percent at the end of June from 102.6 at the end of last year. That compares with the average net leverage of 83.2 per cent for Hong Kong-listed developers with a market capitalization of more than US$1 billion, according to data compiled by Bloomberg. If considering its perpetual notes as debt, the company's net leverage was 291.8 per cent at the end of June.

Standard & Poor's, in May, downgraded the developer's rating because its leverage had increased and was likely to stay high.

Short interest surged to about 29 per cent of free float after the repurchased shares were canceled, according to data compiled by Markit Ltd., with the billionaire chairman's stake in the company rising to 70 per cent. Hong Kong-listed companies typically need to have at least 25 per cent of their stock available for the public.

The stock may be getting shorted on concerns about liquidity and cash flow, according to Domingo Chen, Hong Kong- based chief operating officer of Quantum China Asset Management. It will take time for Evergrande to alleviate investor concerns about the company's balance sheet, he added.

"We think Evergrande's share price is not driven by fundamentals," JPMorgan Chase & Co analysts led by Ryan Li wrote in a Sept 2 research report. The low stock liquidity and share buyback program "will make the share price very volatile, but with limited downside in the near term."

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