Analyst Who Picked Evergrande's Rally Tells Bears to Sit Tight

(Bloomberg) -- Citigroup Inc.'s Oscar Choi, the stock analyst who recommended buying China Evergrande Group before the shares tripled, has advice for short-sellers suffering one of the world's most painful trades this year: Wait.

Evergrande shares may stay at elevated levels as the company's backdoor listing in Shenzhen looms, Choi said in an interview last week. Investors believe the Guangdong-based developer has every incentive to narrow the gap between its Hong Kong valuation and a mainland price, he said.

Bearish investors should wait until at least the third quarter to close out short positions, when weakness in China's property market, such as signs of slowing sales, or negative news on Evergrande, could weigh on the shares, he said.

Shares of the most indebted developer in China have surged more than 250 percent this year, exceeding almost all of the bullish forecasts from analysts. They rose another 11 percent on Monday, before the company said it will redeem the rest of its outstanding perpetual notes by June 30, and jumped again on Tuesday, touching a record HK$17.36.

“Honestly, it's beyond fundamental analysis,” said Choi, who leads a team top-ranked in Institutional Investor's All-Asia research poll for eight years. For bearish investors caught by the recent rally and yet to cover their short positions, “the smart strategy at this moment is waiting for better timing,” he said.

Short Interest

Short interest in the stock, which started climbing from a low in late March, remained above 20 percent as of June 2, according to data from IHS Markit Ltd. Some bearish investors had switched strategy and starting buying shares at about HK$12 on May 26 and 29, Choi said, without giving more details. A sustained rally would help those investors offset some losses, he said. 

Making the case that its Hong Kong-listed assets have been undervalued by investors, Evergrande announced a restructuring plan last October that includes the backdoor listing. The firm raised a total of 70 billion yuan in a two-stage sale of about 26 percent of property unit Hengda Real Estate.

Evergrande has made "huge efforts," said Choi. The company embarked on a buyback spree in April to thwart short-sellers. In a recent move, one or two investors “jumped into the game” and bought about 400 million to 500 million shares, further reducing the public float, he said.

The free float stands at about 22 percent, data compiled by Bloomberg show.

Evergrande, Sunac China Holdings Ltd. and Country Garden Holdings Co. were Citigroup's top picks among Chinese developers earlier this year on potential gains in market share amid industry consolidation. Share prices of those stocks have all more than doubled.

Choi and his team put Evergrande on a list of top picks on Jan. 6 and raised a target price to HK$10 on April 9, citing possible positive surprises in earnings growth and the potential restructuring. 

Other Comments

ON CHINA'S PROPERTY SECTOR

• Investors shouldn't solely focus on gearing with respect to China developers
  • Rally in China's land prices could outweigh high capital costs
    • "It doesn't make sense that investors use gearing as a top benchmark to judge a property company's quality in a developing market": Choi
    • Although Evergrande's borrowing of perpetual bonds during 2013, 2014 added leverage, it helped fund land purchases in tier-2 cities where prices were first to recover in 2015

    ON SECTOR PICKS

    • Positive on Country Garden on possible surprise from earnings growth
      • Co. seen as a suitable pick for investors who look for safe gearing, "uncontroversial" business model and decent growth
    • Sunac has "little downside" as its NAV and other multiples still at "distressed" level
      • Co.'s earnings growth "hard to predict" due to M&A deals
      • Co. has strong sales, land bank and market influence but relatively small market cap
      • NOTE: Sunac has HK$54.1b market cap as of June 5 vs China Overseas Land HK$256.9b: Bloomberg data

      --With assistance from Jake Ulick

      To contact the reporter on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net.

      To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Sree Vidya Bhaktavatsalam, Paul Panckhurst

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