Short Selling Report: China Evergrande Group (3333:HK)

Short selling data can help active investors manage portfolio risk. Short sellers tend to be well-informed, high-conviction traders. If they’re shorting a stock, there’s usually a good reason they are doing so.

In this report, we are going to look at the short selling data on China Evergrande Group (3333:HK). China Evergrande is the second-largest property developer in China by sales. It is based in the Guangdong Province, and primarily sells apartments to upper- and middle-income buyers. The company is listed on the Hong Kong Stock Exchange and currently has a market capitalization of HKD 68.9 billion.

China Evergrande: Short Selling Activity

Looking at the short selling data on China Evergrande, we see several red flags.

The first is that short interest is very high. Our records show that at present, 395 million shares are on loan. That represents around 20.9% of the free float.

Secondly, the utilization rate has spiked recently. Utilization refers to the number of loaned shares divided by the available shares in the securities lending market, expressed as a percentage. It is essentially a measure of demand for shares on the short side. At the end of July, utilization was 53%. Today, however, it’s 87.6%. This tells us that demand for the stock from short sellers have increased significantly this month.

Finally, the cost to borrow stock is elevated at 28.8%. This also signals that demand for the stock from short sellers is very high right now.

Liquidity Issues

China Evergrande has been experiencing liquidity issues recently due to the large amount of debt on its balance sheet. In June, the group advised that it had not paid some commercial paper on time, while in July, the group had a $20 million deposit frozen by a court due to a loan dispute with Guangfa Bank. Analysts at S&P Global believe the group has over 240 billion yuan ($37 billion) of bills and trade payables to settle over the next year, of which around 100 billion yuan is due in 2021.

As a result of these liquidity issues, credit ratings agencies have downgraded the stock. In July, Fitch Ratings downgraded the company two notches, from B to CCC+, stating that the negative developments surrounding Evergrande may weaken investor confidence, further pressuring its liquidity. Meanwhile, in early August, S&P Global downgraded the company two notches, from B- to CCC. "We lowered the ratings because Evergrande's liquidity position is eroding more quickly and by more than we previously expected," said the ratings agency.

China Evergrande’s share price has already experienced a significant decline on the back of the concerns over the company’s liquidity. However, the short selling activity here suggests that short sellers expect to see further share price weakness. Given the high level of short interest, we think caution is warranted towards the stock at present.