Photographer: Billy H.C. Kwok/Bloomberg

China Property Bears Crushed by Relentless Rise in Stocks

  • Short interest ebbs as Evergrande, Sunac lead MSCI China gains
  • Sunac poised to report earnings after aggressive expansion

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China property bears have been beaten back as shares of top developers climb to record levels amid soaring profit.

Bearish wagers on China Evergrande Group and Sunac China Holdings Ltd., the nation’s two most-shorted developers, have ebbed from highs earlier this year in an upbeat earnings season.

A 250 percent jump in Evergrande’s core profit and lower debt levels helped extend its share rally this year to more than 400 percent, making the stock the best performer in the MSCI China Index. Short sellers have also cut bets on Sunac, the second-best performer, as the company’s shares rose to a record after the developer forecast a fifteen-fold increase in profit. Sunac is due to report earnings before the market opens on Friday.

Short interest in Sunac peaked on July 31 after a $6.6 billion purchase of Dalian Wanda Group Co. assets stoked concerns about a debt-fueled expansion. Yet, after a bond sale appeared to alleviate funding concerns, such bets have slumped to levels seen before the deal. In Evergrande, short interest has continued to slide from a peak on May 9 as investors are steam-rollered by a relentless stock rally, according to data from IHS Markit Ltd.

“Short-sellers generally target short- and medium-term stress in a company,” IHS Markit London-based analyst Simon Colvin said by phone. “When Sunac was able to address their immediate liquidity issue, they become less attractive for a short seller.”

At Evergrande, which has proven to be the world’s most painful short trade this year, fees to borrow shares of the Hong Kong-listed builder for shorting have fallen to about 2 percent from the 10 percent level seen in May, after what Colvin described as a “massive squeeze.” Among red flags deterring bearish speculators: one of billionaire Chairman Hui Ka Yan’s allies kept buying Evergrande shares and management vowed to switch to a more profit-oriented model. Some analysts have more than doubled price targets for Evergrande.

A pullback in bearish bets on the two companies highlights a swing in perception toward aggressive players in a sector that’s showing signs of weakening. While China’s real estate industry showed signs of a slowdown last month, the biggest players -- with access to funding -- have an advantage ahead of what Citigroup Inc. has called a “mega-consolidation” in the industry.

What’s more, a boom in the housing market has buoyed earnings in the first half, and a gradual booking of projects sold earlier will continue to boost profits. Evergrande’s unbooked sales are “huge”, analysts at Citigroup wrote, and market expectations for margins to keep expanding may lead to “short-term excitement” for the stock’s price, JPMorgan Chase & Co. said.

That may turn off bearish speculators, at least for now.

“Scouting for a catalyst of a quick share-price fall, short-sellers may think short capital may be better deployed somewhere else,” Colvin said.

— With assistance by Emma Dong, and Moxy Ying

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