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Evergrande Slumps on Short-Seller Report: Hong Kong Mover

Evergrande Slumps on Short-Seller Report
A woman walks near high-rise residential property in Guangzhou, Guangdong Province, China. Photographer: Nelson Ching/Bloomberg

Evergrande Real Estate Group Ltd., China’s second-biggest developer by sales, fell by the most since September in Hong Kong trading after it was targeted in a newsletter by short-seller Citron Research. Evergrande said claims in the report were untrue.

The stock pared a record loss to end 11 percent lower at HK$3.97 at the close. Directors of Evergrande noted a report claiming the company “has used accounting tricks and bribes to hide the fact that it is truly insolvent,” and said the allegations are false, according to a statement sent during the midday trading break.

The developer, one of the 114 companies that the government inspected last year, provided inaccurate information on 6.4 billion yuan ($1 billion) of assets in its 2009 financial report, overstated costs and underpaid taxes, the ministry of finance said in a statement in October. The developer said the irregularities came from its Guangzhou unit and they were rectified in the 2010 statement.

Evergrande said its cash flow is sufficient and denied Citron’s allegations that it has acquired land illegally, the Securities Times reported today, citing Chairman Hui Ka Yan as saying on an investor call. The company’s directors will consult with lawyers, the report said, quoting Hui.

The Guangzhou, southern China-based developer bid 32,967 yuan per square meter (10.76 square feet) at an auction for land in the city’s new financial district Zhujiang Xincheng this week, said an Evergrande official, who asked not to be named because of company policy. The price, based on the site’s buildable area, was a record high for China’s southern business hub, the official Xinhua news agency reported on June 19.

Yields Surge

The company will make a further clarification announcement in due course, it said in the statement. Chief Financial Officer Parry Tse couldn’t be reached on his office number, and the company’s investor relations office didn’t immediately respond to an e-mail and eight phone calls seeking comment.

Yields on Evergrande’s 13 percent bonds due January 2015 surged as much as 548 basis points, or 5.48 percentage points, to 19 percent in Hong Kong, according to prices from Royal Bank of Scotland Group Plc. The bonds were trading at 17.3 percent at 4:23 p.m., the data show.

Wagers betting on declines in shares of Evergrande soared to the highest level on record before the Citron report today triggered a 20 percent slump in the stock, the most since the shares started trading in 2009. Short interest as a percentage of shares outstanding rose to 6.74 on June 19, according to the most recent data compiled by Data Explorers. Short sellers borrow securities with a view to sell them, expecting to be able to buy them back more cheaply in the future.

Cash Shortage

Cash-strapped Chinese developers have been reluctant to buy land after government curbs introduced since 2010 to prevent a property bubble tightened credit, draining liquidity. The cash ratio, a measure of liquidity for developers, fell to the lowest since 2008 as of December, according to data on 146 listed builders in China and Hong Kong compiled by Bloomberg.

Evergrande posted contracted sales of 10.4 billion yuan in May, a record single month for the developer, it said in an e-mailed statement on June 11.

The report was posted on Citron’s website yesterday. The research firm gives its address as a post office box in Beverly Hills, California. They didn’t provide a phone number on the website. There was no immediate reply to a message left via the website.

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