Renhe Commercial (1387) was clobbered last week, falling 29.6 per cent. It fell 18.6 per cent on Thursday alone, mostly because of rumours a project in Dongguan, Guangdong, was illegal.
The firm put out a statement on the same day stating the project was indeed legal. Analysts believed hedge funds were behind the rumour, noting that the firm drew HK$14.3 billion in short-selling turnover on Thursday.
Kaiser Choi (South China Research) says there are two big concerns hitting Renhe: the worry that the Dongguan property project was illegal, and a concern that the company will not be able to access a form of high-cost loans from entities known as trusts.
Choi thinks both rumours are incorrect. He notes the firm affirmed the legality of its Dongguan development in its statement.
On the second point, Choi says while there is talk the China Banking Regulatory Commission will stop property firms from taking out trust loans, Renhe has clarified that it doesn't have any.
'I think some hedge funds have built up short positions. Today [Thursday] is a good day to short,' says Choi, referring to the euro-zone crisis, which was battering share markets last week.
Danny Bao (Daiwa Securities) focuses on the Dongguan rumour, questioning why it did not come from any credible, named sources.
'It's hard to believe the company would do something without valid government consent,' says Bao, who visited the Dongguan site in June. Bao says the trust rumour would be an issue for Renhe only if it had cash-flow problems and relied on trusts for working capital. He said this is not the case; Renhe has ample cash on hand and low net gearing, about 30 per cent.
Wee Liat Lee (Samsung Financial) concurs. 'We think the Dongguan project is legal. I'm not sure how the market thinks otherwise,' he says.
He thinks the firm has no trust loans (and would therefore be unaffected by a CBRC decision in that area), and adds sentiment towards the property sector is very negative and investors need little reason to sell. 'The market is pricing in the possibility that some of these companies will go bust. Investors are looking for a sharp slowdown [in the property sector],' says Lee.