Short Sellers Target Chinese Developers as Rout Deepens

Photographer: Tomohiro Ohsumi/Bloomberg

Cranes operate on a construction site for a commercial building in Shanghai, China. Close

Cranes operate on a construction site for a commercial building in Shanghai, China.

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Photographer: Tomohiro Ohsumi/Bloomberg

Cranes operate on a construction site for a commercial building in Shanghai, China.

Stock traders have doubled bearish bets against some of the biggest Chinese developers amid growing concern that a weaker real-estate market will curb property sales just as borrowing costs surge.

Short interest in Evergrande Real Estate Group Ltd. (3333), the nation’s fourth-largest developer by market value, was at 8.4 percent of shares outstanding on March 17, up from 3.2 percent a year ago, according to data compiled by Bloomberg and Markit Group Ltd. It touched a record 8.6 percent on March 4. Wagers against Guangzhou R&F Properties Co. (2777) and Agile Property Holdings Ltd. (3383) have both reached the highest since December 2012.

Investors are bracing for losses as lenders pull back from the industry and local governments take steps to rein in home values in the second-largest economy. Yields on the dollar debt of Evergrande and Agile surged this week as a closely-held developer with 3.5 billion yuan ($566 million) of debt collapsed, while data showed property prices in some of China’s largest cities rose last month at the slowest pace since 2012.

“I see more downside in the share prices,” said Peter Elston, the Singapore-based head of Asia-Pacific strategy at Aberdeen Asset Management Plc, which oversees about $321 billion. “When property companies get into trouble, generally the weak companies start to get into trouble first. If property price weakness starts to become more pronounced, that’s going to impact the broader market.”

Defaults Spread

The Hang Seng China Enterprises Index added 0.2 percent at the close in Hong Kong. Evergrande shares fell 1.8 percent and Agile rose 0.2 percent. The Shanghai Composite Index slipped 0.2 percent. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. rose 1 percent to 98.18 yesterday.

The collapse of Zhejiang Xingrun Real Estate Co. emerged less than two weeks after the first on-shore bond default by a Chinese company. Shanghai Chaori Solar Energy Science & Technology Co.’s missed coupon payment on March 7 may have been China’s “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.

Evergrande’s dollar bonds fell yesterday, sending the yield to 10.86 percent, the highest level on record, DBS Bank Ltd. prices show. Short interest in Guangzhou R&F, a developer based in the southern Chinese city, has surged to 7.3 percent from 3.3 percent a year ago. The company’s shares fell to their lowest level since October 2012 on March 17.

Bond Yields

Agile Property’s short interest increased to 2.3 percent from 1.3 percent a year ago. Shares have tumbled 55 percent from a high in January 2013. Yields on its February 2017 notes jumped 20 basis points to 7.46 percent yesterday, the highest since they were sold last month, according to Australia & New Zealand Banking Group Ltd. prices.

“The market is concerned about the financial risks of the property industry,” Chen Li, a China equity strategist at UBS AG who has an underweight rating on the property industry, said in a phone interview yesterday. “Some investors are betting that some developers would have credit defaults and financing difficulty as homes sales are slowing and mortgage rates are rising.”

An Evergrande spokesman said the company can’t comment before earnings. An Agile spokesman declined to comment. Two phone calls to Guangzhou R&F’s investment relations officer Vanessa Wang weren’t answered.

Stock Valuations

Recent declines mean Chinese property stocks are approaching attractive levels, according to Calibre Asset Management Ltd. The Shanghai Property Index fell 10 percent this year through yesterday, sending the gauge’s valuation to 1.1 times net assets, the lowest since Bloomberg began tracking the data in 1998.

“As we rely on fund managers to time the market in the long run, recent conversations indicate they are looking at buying,” Norman Chan, the Hong Kong-based head of investment at Calibre Asset Management, said by phone. “I suspect in a big down day, none of them will want to be a hero, but the current level seems to be the level they will start considering.”

History also shows mistiming bets on Chinese real-estate companies can burn short sellers, said John-Paul Smith, a global emerging-market equities strategist at Deutsche Bank AG.

Short interest in Guangzhou R&F reached a record 19.9 percent on July 30, 2012. Shares surged 48 percent in the next six months. Agile climbed 13 percent four months after bearish wagers rose to a record 9.5 percent on March 13, 2012.

Significant Downside

“If you remember in 2012, a lot of funds shorted those stocks and were very badly burnt,” Smith said by phone. “Fundamentally, I would be fairly negative. I would be very hesitant to recommend people to step in and short them as timing is always very difficult with these things.”

The default of Zhejiang Xingrun may signal difficult times ahead for smaller Chinese developers, which face a “rapidly deteriorating” credit environment, uncertain sales outlook and intensifying competition, Standard & Poor’s Ratings Services said yesterday.

“We think there’s a significant downside in this sector,” said Samuel Le Cornu, who helps oversee $1 billion at Macquarie Investment Management. “We haven’t bought anything for the last five years and I can’t see that changing.”

The Macquarie Asia New Stars Fund had an annualized return of 32.5 percent during the past five years, outperforming 99 percent of peers, according to data compiled by Bloomberg.

Second Homes

At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year, with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.

China’s households piled into real estate in recent years as they sought returns beyond the regulated caps on savings deposits. With the nation’s stock market failing to keep pace with economic growth, property offered an alternative, along with trusts that channeled credit to borrowers outside the official banking system.

The implications of falling home prices would be “enormous” because Chinese buyers see property as an investment, Aberdeen’s Elston said. “The prospect of them losing money is a pretty serious eventuality.”

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Richard Frost

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