The world’s most debt-ridden real estate developer will soon be
without its biggest driver of share gains, and investors are
ready to pounce.
China Evergrande Group has been relying on its massive
debt pile to repurchase stock in an attempt to boost its
share price. The company has bought back $880 million of its own
stock in the last month alone,
data compiled by financial analytics firm
S3 Partners. The problem now is that they’re almost out of
shares to buy.
That has short sellers smelling blood. Short interest in
Evergrande is now $726 million, more than double the total
at the start of the year, S3 data show.
Heavy shorting activity in Evergrande comes at a time when
the company’s stock has been surging, likely because of the
buybacks. It’s up 144% in 2017, but that hasn’t stopped short
sellers from going about their business and consistently selling
into the rally throughout the year.
Their persistence finally paid off this past week.
After hitting a year-to-date high on April 25, Evergrande’s stock
has tumbled almost 15%, translating to $74.5 million in
mark-to-market profit for short sellers, S3 data show.
“With Evergrande out of buyback bullets, it will
be up to shareholders to keep its stock price at
says Ihor Dusaniwsky,
the head of research at S3. “As we saw in the last week,
they were not up to the task as long and short sellers drove
Evergrande’s stock price down unimpeded.”
US investors who want to make speculative bets on the
Guangzhou, China-based company — which is listed on the Hong Kong
stock exchange — will need to enlist a broker who can funnel
trades through a local market maker or affiliate firm. Even then,
access to shares may be restricted, requiring the trader to try
and set up a brokerage account with a foreign firm.
Still, existing short sellers look likely to derail
the progress Evergrande has made to increase its valuation —
a plan analysts believe is intended to help the company
obtain a backdoor listing on the Shenzhen Stock
Now, stuck with a $77.1
billion net debt burden and marked as a wildly popular short
target, Evergrande has its work cut out for it.
Not that speculators are particularly sympathetic. S3
forecasts $250 million of new shorts on the company in
May. And with minimal shares left to buy back, the company
is afloat without a crucial life raft.