Shares in Chinese property developer Evergrande Real Estate Group Ltd slumped by as much as a fifth on Thursday – wiping around $1.7 billion off its market value – after the company was targeted by a report from short-sale specialist Citron Research, traders said.
Evergrande, the second-largest mainland China developer by sales, has grown aggressively using debt to fund land purchases, though its acquisitions have slowed this year. This is a rare case, though, of a mainland property company being accused of outright financial mismanagement.
Traders cited a June 20 report, published in English and Chinese on Citron Research’s web site, as the trigger for the share price drop. The report accused Evergrande of presenting “fraudulent information”.
“It’s certainly alarming – the report is pretty straightforward,” said one property fund manager in Hong Kong, who did not want to be identified, but has a position in Evergrande stock. “There are things we want to hear from management,” the fund manager added. “I’m sure they will have their side of the story to tell.”
Like Muddy Waters, Citron Research, run by Andrew Left from his Beverley Hills, California home, is known for targeting companies with research exposing what it claims are financial irregularities. Last year, U.S.-listed Chinese company Harbin Electric took itself private after a year-long battle against fraud allegations made by Citron Research.
Evergrande said the report accusing it of accounting tricks and bribes was “untrue”, adding it would issue a fuller statement later.
According to Thomson Reuters data, Evergrande has outstanding bonds of around $2.8 billion. In a May 31 report, ratings agency S&P said Evergrande’s business risk profile was “fair” and its financial risk profile “significant”, with the key risk factor being its “very aggressive debt-funded growth appetite.”
By 0409 GMT, Evergrande shares were down 17.4 percent at HK$3.70, up a little from a near 5-week low of HK$3.60. Trading volume spiked to the highest since November 2010, with about 380 million shares changing hands.
Chairman Hui Ka Yan owns 63 percent of Evergrande, according to a Thomson Reuters database. The Guangzhou-based company sponsors a big-spending Chinese soccer team, Guangzhou Evergrande, that last month hired former Italy national coach Marcello Lippi to manage the team.