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China’s Evergrande defends itself against alleged bribery, fraud

June 22, 2012

HONG KONG: Evergrande Real Estate, China’s No 2 property developer by sales, said today it may take legal action against a short seller that accused it of fraud, bribery and financial irregularity, and may buy back some of its shares.

Evergrande, which has China’s largest landbank at 137 million square metres, said allegations by Citron Research that it bribed government officials to buy land were “malicious slander”. In a statement, it said it “has never been and will not be engaging in any bribery act in order to obtain benefits”.

Around US$1 billion was wiped off Evergrande’s market value yesterday on news of the Citron Research accusations – which Evergrande dismissed as “totally untrue”. After falling 11.4%
yesterday, Evergrande shares slid as much as 5.5% early today. By mid-afternoon, the stock was down 1%, slightly outperforming the Hang Seng Index.

Analysts have said the bribery allegations may be hard to shake off as Evergrande purchases much of its land through private deals rather than at auction.

The company faces an overhang on its shares caused by doubts over its high levels of debt. It may buy back shares, CEO Xia Haijun told investors today on a conference call organised by Credit Suisse, according to a participant on the call.

Xia did not give details of when the company might buy shares, or how much, the source added.

Evergrande’s debt is 1.5 times its equity, according to Thomson Reuters Starmine data – double the industry average – and three times that of China Overseas Land, the biggest mainland developer by market value.

The balance sheet is shot to bits, it seems to be extremely recklessly run,” said Gillem Tulloch, whose company Forensic Asia provides independent research to institutional investors.

Tulloch said he was concerned about Evergrande’s borrowing and low levels of cash, issues he noted were industry-wide.

Chinese developers raise high levels of cash by selling properties while they are being built, but many divert the cash into land banking rather than keeping it on their balance sheet.

“It’s symptomatic of the property sector in China,” Tulloch said. “They shouldn’t be the most leveraged property companies in Asia. They should be the least leveraged.”

In its statement, Evergrande said it had 28.2 billion yuan (US$4.43 billion) in cash and cash equivalents at the end of last year. It has denied using accounting trickery to cover up its alleged insolvency, and noted auditor PricewaterhouseCoopers signed off on its accounts. It has also said it doesn’t plan to revise its forecast for annual sales of 80 billion yuan.

Personal attack

Evergrande also defended its high-profile chairman Hui Ka Yan (photo above), who owns 63% of the company.

Citron said Hui had an honorary degree from a “diploma mill” – the University of West Alabama – and, contrary to his claims to be a professor, had never taught at Wuhan University of Science and Technology.

Evergrande responded by saying Hui’s credentials were true. “Mr Hui has never exaggerated his
academic qualifications and titles, and has never reaped any benefits from any relevant title,” its statement said.

Citron claimed Hui, who owns a private jet, had poured at least 16.2 billion yuan (US$2.6 billion) into pet projects that are “comically off-strategy and frighteningly expensive for Evergrande’s shareholders”.

Hui sponsors Guangzhou Evergrande, a high-spending Chinese Super League soccer team, which last month hired former Italy national coach Marcello Lippi as its manager. He also sponsors a volleyball team.

Evergrande said the claims were “without basis”, noting the firm’s net investment in soccer was 80 million yuan, with less than 70 million yuan spent on volleyball and “cultural industries”.

In defence

Evergrande said it was putting together a defence team that may take legal action against Citron Research, which is run by Andrew Left from his Beverley Hills, California home. Like Carson Block’s Muddy Waters, Citron targets companies with research exposing what it claims are financial irregularities, and shorting their shares. Both have found China fertile hunting ground.

In January, private equity firm Blackstone exited a joint venture in Guangzhou, with Evergrande buying back a 40% stake in the Royal Scenic Peninsula development for US$162 million.

Evergrande’s bonds were hit early today, with its 2015 bonds opening at 90.1 US cents on the dollar, down 1.3 US cents. They, too, were hit hard yesterday, falling 7 US cents on the dollar.

Despite recovering later, they still traded down around 5 US cents on the dollar from their price of 99 US cents at the start of the week. According to Thomson Reuters data, Evergrande has
outstanding bonds of around US$2.8 billion.

Credit Suisse analyst Jinsong Du told Reuters he sees short-term buying opportunities in Chinese property stocks after strong sales in May, though he is bearish on the sector beyond that. “Housing prices are on the way up so there are policy concerns in the medium term,” he said. “The share price of the sector has already run up.”



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