Evergrande shares slump on solvency claims

PUBLISHED : Friday, 22 June, 2012, 12:00am
UPDATED : Friday, 22 June, 2012, 12:00am


Evergrande Real Estate, the second-largest mainland developer by sales, tumbled yesterday on accusations that it had fabricated its books and asset value.

The Hong Kong-listed Evergrande slumped as much as 19.63 per cent in the morning session after short-seller Citron Research said the developer was insolvent. Following its denial of the claims, its shares ended at HK$3.97 each, 11.38 per cent lower than Wednesday's close.

Chairman Hui Ka-yan held a teleconference with investors and analysts at 1.30pm to reject the allegations, but uncertainties remained.

Fitch Ratings said the claims did not immediately affect the Guangzhou-based developer's liquidity or broader credit profile.

Citron said Evergrande was insolvent and would be severely challenged from a liquidity perspective this year. Evergrande reported its equity was 35 billion yuan (HK$42.72 billion) at the end of last year.

Citron identified six alleged cases of accounting misstatement, where Evergrande either overstated assets or understated liabilities. It said the pro forma equity of Evergrande should be negative 36 billion yuan.

It also claimed the developer bribed local officials to secure land at below market prices and disregarded idle land laws on the mainland.

Hui, who refers to himself as a doctor and professor, was also accused of having bogus credentials. Citron said he secured his doctorate from a mail order programme at the University of West Alabama.

Citron said Evergrande had invested heavily in unprofitable projects. It had spent at least 16.2 billion yuan as of the end of last year on money-losing investments that included a soccer team, a volleyball team, the largest soccer academy in the world and entertainment firms.

The Citron report also led to a slump in the shares of other mainland developers, including Guangzhou R&F Properties, Country Garden and China Resources Land.

Yesterday, Evergrande said the claims were untrue and it would issue a clarification announcement later.

In the meeting with investors, Hui repeated that the allegations were false and the management would go to Hong Kong to set up a legal team and take legal action in order to protect the interest of shareholders.

He said the firm had sufficient cash flow and more than 13 billion yuan on hand. 'Our cash flow has improved as property sales in second quarter were good,' he said, adding that they acquired sites legally. As for the soccer team, he said the investment formed part of the firm's social responsibility and brand-building.

Fitch Ratings believes Evergrande does not need to access offshore capital markets in the near term as the first of its capital market debt maturity is not due until January 2014. It noted the firm had a cash balance of 20.1 billion yuan at the end of last year.

Deutsche Bank research analysts Tong Tsang and Jason Ching said the accusations were not valid. They estimated Evergrande's liquidation value was close to HK$67 billion.