China’s Distressed Developers Soar in Wave of Speculative Buying

Speculative bets that Chinese authorities will widen support for the property sector sent some of the country’s ailing developers surging by the most on record.

(Bloomberg) — Speculative bets that Chinese authorities will widen support for the property sector sent some of the country’s ailing developers surging by the most on record. 

A Bloomberg Intelligence gauge tracking Chinese builders gained nearly 10% Wednesday, the most in more than a month. Heavily indebted developers with depressed valuations were among those to rally the most, with Sunac China Holdings Ltd. soaring 68% alongside a spike in trading volume. China Evergrande Group closed up 83% — capping the biggest gain since its 2009 listing. 

The sudden upturn comes after a rout in August, when the property sector showed signs of deepening financial problems. Authorities have been introducing bolder measures in recent weeks to put a floor under the crisis, including lower down payments and looser mortgage rules for some homebuyers. The latest boost came from a Securities Times article, which went a step further to say China should drop home-buying restrictions in most regions other than top-tier cities.

“It’s some hedge funds speculating on more stimulus,” said Xin-Yao Ng, investment manager of Asian equities at abrdn Asia Ltd. “The distressed developers are definitely the speculators’ pick to bet on stimulus as they see the biggest delta to policy news.” 

The magnitude of the rally suggests some investors see a glimmer of hope from the government’s latest efforts, though whether the measures will succeed in reviving the sector remains in doubt. 

The surge in home sales in Beijing and Shanghai over the weekend shows sentiment improving. Investors also took note of looser restrictions in Shenyang, which was cited by the Securities Times as an example that should be followed by other cities. The capital of northeast China’s Liaoning province has removed home-purchasing curbs in its city center.  

A record wave of developer defaults has pushed many of them to mere penny stocks, whose shares trade at around — or below — one Hong Kong dollar. Such cheap valuation subjects them to volatile moves on any potential catalysts. The property gauge now trades at a price-to-book ratio of 0.3, compared with a five-year-average of 0.47. Even with this week’s gains, the index remains more than 30% below this year’s high in January. 

Shares of Country Garden Holdings Co., once the country’s largest property developer, now trade at around HK$1.2 apiece, about 8% of their peak level. Wednesday’s 21% jump, accompanied by a record trading volume, only added around $750 million in value to the battered company’s market capitalization.

“If you ask me if this sector is worth buying – for investors, it’s a no. For speculators, it’s a yes,” said Kenny Wen, head of Investment strategy at KGI Asia Ltd. “It’s likely that we see other property developers having new crisis through the end of this year. China’s property trouble is not solved completely.” 

READ: Sunac Short Sellers Take a Hit as Stock Soars 170% in Three Days 

The rally may be driven by short squeeze of some heavily-shorted names, according to Steven Leung, executive director at UOB Kay Hian. The major gainers are mostly small- and medium-sized developers which tend to have big swings, he said.  

Some market watchers point to the rally’s speculative nature given that the gains have been concentrated in ailing private developers with liquidity stress and weak fundamentals. Shares of the country’s stronger state builder China Resources Land Ltd. closed in the red. The CSI 300 Materials Index dropped 0.5%.  

The broader equities market was muted, another evidence that investors expect the sector’s rebound to be fleeting. The CSI 300 benchmark of onshore shares was down 0.2%, while the Hang Seng China Enterprises Index climbed 0.1%. 

Chinese high-yield dollar bonds, mostly issued by developers, were largely unchanged with little liquidity Wednesday, according to credit traders. Country Garden’s dollar bonds still trade at deeply distressed levels around 9-14 cents on the dollar despite a recent rebound, indicating investors remain on edge about the risk of an eventual default.

Investor attention will likely turn next to any signs of recovery in housing demand, according to Willer Chen, senior analyst at Forsyth Barr Asia Ltd.

“The high frequency sales data in the next two weeks is crucial for investor judgment on whether the policy is helpful enough,” Chen said.

–With assistance from Alice Huang, Dorothy Ma, Mark Cranfield and Emma Dong.

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