Photographer: Tomohiro Ohsumi/Bloomberg

The World's Biggest Stock Rally Loses Steam

  • Evergrande shares have declined 20% since July 27 record
  • Sunac, Country Garden also drop as analysts expect more curbs

It had to end sooner or later. After an almost 400 percent surge this year through late July that led an unprecedented rally among Chinese developers, China Evergrande Group shares are now leading the way down.

Evergrande, the top performing stock in the MSCI All-Country World Index in the 12 months through a July 27 record, slumped 20 percent since then to rank among the top decliners. Evergrande and other high-flying developers have fallen from records in the past week as investors are betting that a tightening campaign by leaders to cool home prices will hurt sales in the second half.

Sunac China Holdings Ltd. shares have fallen 7.5 percent since July 27, and Country Garden Holdings Co. dropped 3.6 percent. Still, the declines are minuscule compared with the immense gains notched amid red-hot demand for property in China. Sunac shares rose 4 percent on Tuesday, bringing its gains over the past year to 250 percent, and Country Garden advanced 2.5 percent for an almost 200 percent increase over the past year. Evergrande shares rose 4 percent in Hong Kong trading.

“Worries about the tightening measures are hurting the overall sentiment on the sector,” Toni Ho, analyst at Rhb Osk Securities Hong Kong Ltd., said in an interview. “Companies like Country Garden and Evergrande are leading the declines” in part because investors are selling developers with high levels of debt, Ho said.

Evergrande became a target for short sellers after an acquisition spree that turned it into China’s most indebted developer. Sunac has since emerged on track to wrest that title from Evergrande, after a $6.5 billion deal to buy theme parks from Dalian Wanda Group Co.

Evergrande’s share rally was helped by a series of stock buybacks earlier in the year and also got a boost from purchases by Chinese Estates Holdings Ltd., the company controlled by Hong Kong billionaire Joseph Lau and his family. Chinese Estates bought Evergrande shares worth $1 billion since April, according to filings.

A gauge tracking Chinese developers gained 73 percent through July 27 this year, before paring some gains. It is still outperforming the broader market, with a 67 percent gain this year, more than double the return of the Hang Seng Index.

“It’s reasonable for investors to cash in and stand by the sidelines for now,” Raymond Cheng, a Hong Kong-based analyst at CIMB Securities Ltd. said in an interview. “Further upside would be rather limited, given year-to-date share price gains have been around 100 percent for some of the developers.”

The rally has been stoked by rising home prices in many Chinese cities amid soaring demand. That’s prompted China’s leaders to impose home buying restrictions as they seek to snuff out asset bubbles and contain risks ahead of a party reshuffle later this year. Restrictions in bigger cities are spurring buying in smaller ones and sales jumped in June even as mortgage rates climbed, signaling that more restrictions may be required to cool investor ardor.

“The developer share rally will wane into the second half as China will likely continue to tighten market liquidity and roll out more control measures, hurting property sales growth,” Katrina Fu, a Hong Kong-based analyst with Sanford C. Bernstein, said by phone.

Developers such as China Vanke Co. and China Overseas Land & Investment Ltd., whose shares have trailed those of rivals such as Evergrande, will likely lead gains in the second half, she said.

“We’ll see greater divergence among developers going forward, with quality names and laggards in the earlier rebound likely outperforming peers.” 

— With assistance by Jeanny Yu, Emma Dai, and Amanda Wang

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