FEARS OF a hard landing for China’s property market have generally eased in the last few months, but have not gone away entirely.
Nervous investors were even more jittery last week after a report by the US-based short-seller Citron Research said China’s second-biggest property company by sales, Evergrande, was “insolvent”, “fraudulent” and a Ponzi scheme.
In its report, entitled Deception on a Grande Scale, Citron Research describes Evergrande as “essentially an insolvent company that has consistently presented fraudulent information to the investing public”.
It said bribery, excessive spending and off-balance sheet transactions were the foundation of Evergrande’s financials.
The report badly affected Evergrande’s shares, knocking €800 million off the value of the company on the day the report was published.
Evergrande said the accusations were untrue, and that it was organising a legal team to defend itself.
It was also sticking to its forecast for annual sales of 80 billion yuan (€10 billion).
The focus of the report’s ire is chairman Hui Ka Yan, who owns 63 per cent of Evergrande.
The report said the company has been borrowing large sums of money, then using the funds to pay off the previous round of financing, all the time underwritten with personal guarantees from Hui.
In a conference call, the company sought to reassure investors it had 13 billion yuan of cash on hand, which is sufficient to cover its operations. “The other side’s accusation is absurd, and we are very, very angry,” Hui told investors.
Citron had written: “Evergrande is not a story about the ‘China real estate bubble’; rather it is a tale of a company that has abused the capital markets as well as the generous lending of the Chinese government in order to enrich one man, aggrandise his personal ego and support his pet projects.”
Among those pet projects are the football club Guangzhou Evergrande and the Evergrande Real Madrid football academy, which aims to become a world-class soccer training school.
What is remarkable is that the Citron report runs contrary to what nearly everyone else is saying about Evergrande.
Citibank and Deutsche Bank have rated Evergrande shares as one of the preferred mainland Chinese real estate stocks, while Standard Chartered, Goldman Sachs and DBS Bank all have offered Evergrande as a “Buy”.
Earlier this month, a research report by China’s State Council, the Real Estate Institute of Tsinghua University and the China Index Academy described Evergrande as No 1 among the Hong Kong-listed real estate companies in terms of comprehensive strength.
That said, there have been questions about the company’s accounts before.
In October last year, the finance ministry fined the company for providing inaccurate information in its 2009 financial statements.
Citron’s report makes comparisons with Enron, stating Evergrande stock represented a good short opportunity in relation to other exposure in the Chinese capital markets. “Whether it be the capital markets, government enforcement, hard or soft landing, the endgame for Evergrande is a certainty; the only uncertainty is the timing,” it said.
