Mainland property stocks have done very well recently, with Evergrande Group (03333.HK) spiking over 50 percent within five trading days.
What is behind the rally and why has Evergrande outperformed?
China’s housing market has continued to soar since the second half of 2015, and leading players have gained more market share.
Chine Vanke Co. Ltd. (02202.HK), China Overseas Land & Investment Ltd. (00688.HK) and Evergrande benefited the most.
As strong sales will be reflected in the companies’ earnings this year and the next, investors have piled into the sector.
Evergrande reported its contracted sales revenue surged 85 percent to 373.3 billion yuan (US$54.88 billion) last year, making it the country’s largest property developer. The robust sales revenue has driven up its valuation.
However, the highly leveraged Evergrande has always been trading at a discount to peers because of its higher risk profile.
But despite its increasing debt ratio, the company has continued to acquire land in major Chinese cities over the years.
At the end of 2015 its debt ratio soared over 400 percent, if its perpetual debt is included.
Evergrande’s share price was only HK$5 at the beginning of this year, with a price-to-book ratio of 1.
Its market value was around HK$60 billion, compared with over HK$200 billion for both Vanke and China Overseas Land & Investment.
Now that the latest housing boom has enabled Evergrande to reduce its debt ratio, investors began to see the company in a different way.
Evergrande started to plan for a backdoor listing on the domestic stock market by taking control of Shenzhen Special Economic Zone Real Estate & Properties (000029.CN) last year.
The plan is making solid progress, and is expected to prop up the share price of its Hong Kong-listed unit if it succeeds.
In support of the backdoor listing plan, Evergrande has spent over HK$6 billion in share buybacks over the past month or so.
It has bought back more than 720 million shares, squeezing most short sellers out of their positions.
As a result, Evergrande’s share price has soared 83 percent since May, while its short position ratio slumped to 1 percent from over 24 percent.
Currently, the company’s market value is nearly HK$200 billion, while its historical price-to-book ratio has rebounded to nearly 4.
But since its valuation is no longer way below that of comparable peers and short positions have been largely squeezed out, further gains would be harder to come by.
This article appeared in the Hong Kong Economic Journal on May 31
Translation by Julie Zhu
[Chinese version 中文版]
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