Market Calls

PUBLISHED : Monday, 17 October, 2011, 12:00am
UPDATED : Monday, 17 October, 2011, 12:00am

Evergrande Real Estate (3333), China's second-largest property developer, was a big mover last week, up 14 per cent.

News that the mainland's Ministry of Finance had fined the firm for underpaying its taxes caused barely a ripple in its share price. Of much greater relevance was the firm's release, on Wednesday, of its September revenue figures, showing a 79 per cent year-on-year rise in contracted sales.

That sounds impressive but analysts were quick to note that Evergrande's month-on-month rise for such sales was just 1 per cent.

The view that emerged last week was that Evergrande's rocketing growth is finally starting to taper off. However, the company has been hit by repeated rumours of much more serious problems about its cash flow, and most analysts took last week's news of merely slowing growth as good news.

Carol Wu (DBS Vickers) says the firm's September's sales figures were reassuring, if not exciting. She notes that, typical for the mainland property sector, Evergrande has registered extraordinary growth in recent years. In 2005-06, the firm was only relevant in Guangdong. It has since become a more national enterprise with its land bank rising from about 40 million square metres in 2007 to a current 100 million square metres. 'It's very fast growth,' says Wu.

In a climate where mainland authorities have been tightening consumers' access to mortgage finance and developers' access to bank loans, and of concerns about an economic downturn in China, developers have been susceptible to rumours of being overextended.

Wu, who has a buy rating on the stock, says Evergrande has battled persistent rumours of having cash-flow difficulties, and that its sales figures are not accurate. She says the rumours are unfounded and its September results show that sales - and cash levels - remain healthy.

However, she says the firm now needs to move to slower growth and more conservative finances.

'For a small company to grow to such a huge scale in three years, the management has to be aggressive,' says Wu. 'But if you want you want the model to be sustainable ... you have to be more cautious about your expansion plan.'

Alan Jin (Mizuho Securities) largely agrees with Wu. He says speculation about the health of Evergrande's cash position was addressed by the healthy September data.

'Analysts quite like the result and the worries about cash flow have eased,' says Jin. He adds that the MoF investigation is old news and not a concern. Jin has a buy rating on Evergrande.

Kevin Gin (Yuanta) agrees that its cash flow and debt have dominated discussions about this firm. 'A lot of people were panicking because of the debt levels,' he says.

He acknowledges gearing is high (its net debt to equity is about 75 per cent). However, Evergrande launched nine property projects last month, and it has already almost fully achieved its 2011 sales target of 70 billion yuan (HK$85.1 billion).

He adds that while the mainland property sector is finally slowing down, the large listed developers are taking increasing market share, and their growth outlook is still strong. Gin rates the stock a buy.

The views stated here are those of analysts and are not stock calls by the South China Morning Post


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