Accounts claims 'totally untrue'
Financial institutions have rejected a short seller's accusations of accounting impropriety against Evergrande Real Estate but their support failed to prevent a further slump in its shares yesterday.
JPMorgan, Credit Suisse and Deutsche Bank maintained a positive view on Evergrande after Citron Research's accusation against the developer while Fitch Ratings said the allegations do not immediately affect the developer's credit profile.
Citron's claims that Evergrande 'has used accounting tricks and bribes to hide the fact that the company is in fact insolvent' are 'totally untrue', the developer said in a statement to the Hong Kong stock exchange yesterday.
Evergrande's shares rebounded 3.02 per cent to HK$4.09 in the morning yesterday but fell in the afternoon to close down 3.53 per cent from the previous day at HK$3.83. Shares in most developers, including China Overseas Land and Guangzhou R&F Properties, rose.
'The stock fell because of the poor performance of the stock market and because investors became cautious about privately owned mainland companies,' said Kenny Tang Sing-hing, general manager of AMTD Financial Planning. 'Fund managers took profit by selling the shares after it rebounded significantly.'
Evergrande has lost HK$9.8 billion of its value in two days as a result of Citron's accusation that it either overstated assets or understated liabilities. Citron identified six alleged cases of accounting misstatement.
Its biggest shareholder, chairman Hui Ka-yan, owns a 62.8 per cent stake in the company.
The 53-year-old Hui was sixth on Forbes' Mainland Rich List in 2011 with a US$6.2 billion fortune. He is the richest property tycoon on the Hurun China Rich List, ranking fifth with wealth of 43 billion yuan (HK$52.8 billion).
He set up Evergrande in 1998 and his first project was a lucrative residential development in Guangzhou. Bought for 686 yuan per sq m, it sold for 2,500 yuan per sq m.
He built on this success, marketing his projects as 'selling at discount prices, buying for capital value growth'. He also used film stars and celebrities to promote his projects, getting them to kick off sales.
These strategies helped Evergrande grow from a local developer with a staff of 20 into one of the country's key developers, with projects across the mainland and more than 30,000 employees. It has also branched out into entertainment, sport and commercial property.
The company failed to list in Hong Kong in March 2008 as planned because of poor market sentiment. In 2009, its offering went ahead after it secured former New World Development chairman Cheng Yu-tong and his tycoon friends as investors.
Evergrande focuses only on third- and fourth-tier cities and mainly develops mass residential projects, unlike other big mainland developers. It has just a few projects in first-tier cities such as Guangzhou.
Since Beijing's measures to cool the sector target first-tier cities and the luxury residential market, Evergrande has felt less of an impact than other developers. Its focus on third- and fourth-tier cities helps it to continue its strategy of buying cheap land. The average price it pays is 667 yuan per sq m.
A business model of 'buy and sell frequently' has helped the developer to achieve average growth of 60 to 70 per cent since it listed in 2009, despite a poor market in the past two years.
Citron is similar to firms such as Muddy Water and GeoInvesting which sell short and make a profit by issuing a negative report on a listed company.