China developers sink as world’s biggest stock rally loses steam

HONG KONG: It had to end sooner or later. After an almost 400% surge this year through late July that led an unprecedented rally among Chinese developers, China Evergrande Group shares are now leading the way down.

Evergrande, the top performing stock in the MSCI All-Country World Index in the 12 months through a July 27 record, slumped 22% since then to rank among the top decliners.

Evergrande and other high-flying developers have tumbled in the past week as investors are betting that a tightening campaign by leaders to cool home prices will hurt sales in the second half.

Sunac China Holdings Ltd shares have fallen 11% since July 27, and Country Garden Holdings Co dropped 5.8%. Still, the declines are minuscule compared with the immense gains notched amid red-hot demand for property in China.

Sunac shares have jumped 237% over the past year, and Country Garden has advanced almost 200%.

“Worries about the tightening measures are hurting the overall sentiment on the sector,” Toni Ho, analyst at Rhb Osk Securities Hong Kong Ltd, said in an interview.

“Companies like Country Garden and Evergrande are leading the declines” in part because investors are selling developers with high levels of debt, Ho said.

Evergrande became a target for short sellers after an acquisition spree that turned it into China’s most indebted developer.

Sunac has since emerged on track to wrest that title from Evergrande, after a US$6.5bil deal to buy theme parks from Dalian Wanda Group Co.

Evergrande’s share rally was helped by a series of stock buybacks earlier in the year and also got a boost from purchases by Chinese Estates Holdings Ltd, the company controlled by Hong Kong billionaire Joseph Lau and his family. Chinese Estates bought Evergrande shares worth US$1bil since April, according to filings.

A gauge tracking Chinese developers gained 73% through July 27 this year, before paring some gains. It is still outperforming the broader market, with a 65% gain this year, more than double the return of the Hang Seng Index.

“It’s reasonable for investors to cash in and stand by the sidelines for now,” Raymond Cheng, a Hong Kong-based analyst at CIMB Securities Ltd said in an interview. “Further upside would be rather limited, given year-todate share price gains have been around 100% for some of the developers.”

The rally has been stoked by rising home prices in many Chinese cities amid soaring demand.

That’s prompted China’s leaders to impose homebuying restrictions as they seek to snuff out asset bubbles and contain risks ahead of a party reshuffle later this year.

Restrictions in bigger cities are spurring buying in smaller ones and sales jumped in June even as mortgage rates climbed, signaling that more restrictions may be required to cool investor ardor.

“The developer share rally will wane into the second half as China will likely continue to tighten market liquidity and roll out more control measures, hurting property sales growth,” Katrina Fu, a Hong Kong-based analyst with Sanford C. Bernstein, said by phone.

Developers such as China Vanke Co and China Overseas Land & Investment Ltd, whose shares have trailed those of rivals such as Evergrande, will likely lead gains in the second half, she said.

“We’ll see greater divergence among developers going forward, with quality names and laggards in the earlier rebound likely outperforming peers.”

Worries about the tightening measures are hurting the overall sentiment on the sector. Toni Ho