Are investors short selling in Hong Kong

World's most painful short sale, getting worse for bears

(Bloomberg) - China Evergrande Group's incredible rally resulted in the world's most painful short selling this year. And what makes matters worse, pessimistic investors pay even higher fees to suffer.

The fees to borrow shares of the Hong Kong-listed property developer for short sales have more than quintupled since January to around 10 percent, reports Simon Colvin, an analyst at IHS Markit Ltd. And since Evergrande began buying back shares in late March, fees have doubled. Shares that are available for loans have almost all been used up, which leads to the higher lending fees.

Evergrande's share price has more than tripled this year, hitting short sellers and marveling even some of the most bullish equity analysts. Part of the strong rally can be explained by Evergrande's plan to raise funds from strategic investors ahead of mainland China's backdoor listing, as well as speculation that the company will benefit from rising home sales in smaller Chinese cities. In addition, there is the share buyback.

“I would not advise investors to sell short Evergrande because of its strong momentum. It's too risky, ”said analyst Raymond Cheng of CIMB Securities Ltd. in Hong Kong in a telephone interview with Bloomberg. “The momentum will remain strong until the backdoor listing is completed. And after that there may be a correction in the stock price. "

On Monday of this week, stocks had shot up as much as 27 percent to an all-time high. Competitors such as Country Garden Holdings Co. and Sunac China Holdings Ltd. rose by more than 10 percent. Among other things, the rally raises questions at JPMorgan Chase & Co. In a customer note received on Friday, US bank analysts said Evergrande's business model was unsustainable.

Pressure on short sellers mounts as investors stock up on their pessimistic positions, said Oscar Choi, an analyst at Citigroup Inc. That could add to the increased demand for the company's shares.

In a typical short sale, investors borrow stocks and sell them with the expectation that the price will fall. If the bet is successful, the investor will later buy back the shares at a lower price and return them to the original borrower. The difference in price is the profit.

After the rally on Monday this week, Evergrande's rise is the largest of the top short selling targets worldwide. Companies with a market value of at least 1 billion dollars and a short sale share of at least 10 percent are taken into account, according to Markit, data from Bloomberg show.

The only other bet that has been similarly painful for short sellers is US company Applied Optoelectronics Inc. The company's shares rose 205 percent this year, according to the data.

Evergrande trades at a record 36 times reported earnings. That's more than double the Country Garden and Sunac ratings. The price increase on Monday alone caused the market value to rise by $ 5.3 billion.

Evergrande shares trade at 36 times expected earnings. That is more than double the rating for competitors Country Garden and Sunac. Falling bets were behind 20.7 percent of free float on May 25, data from IHS Market shows. At the same time, the company's share price is around 118 percent higher than analysts' consensus expectation for the next twelve months.

Some analysts are still optimistic. Morgan Stanley's John Lam, who is particularly positive on stocks with an "overweight" recommendation, sees a price target of 12 Hong Kong dollars, data from Bloomberg shows. He justified his assessment by saying that management has taken steps to raise the second-round target for strategic investments from 15 billion yuan to 30 billion yuan.

Evergrande wants to present the six-month figures in August. That could be another potential catalyst for stock price, according to Morgan Stanley.

- With the help of Richard Frost

Translation editor: Barbara Brendel [email protected]

© 2017 Bloomberg L.P.