Evergrande in PR Blitz Against Shorts

Leading Chinese real developer Evergrande has been aggressively defending itself and its share price since being accused of fraud by Citron Research on June 20th, relying on fast deployment of an international public relations campaign to try to restore faith in the company.

Since the short selling Citron published its accusations, Evergrande fired off six press releases from June 22nd to June 29th.  That’s nearly a press release a day, and their agency doesn’t seem to be getting much time off on the weekends.  However, despite this PR defense, buyers have been slow to buy back into the stock.  Compared to the HK$4.58 that the stock was trading at pre-report, last Friday’s closing price of HK$3.93 per share still represents a more than 14% drop in value for the developer.

Still, given that other Citron targets such as Xinhua Finance Media were later delisted, Evergrande seems to be holding up reasonably well so far.

In its defense, the real estate developer has been focussing on what it asserts is ongoing support from investment banks for the company and it’s stocks.  Take a look at the press releases and you will see that the thrust of the campaign so far is to show a kind of social proof among the investment community for Evergrande’s shares:

Jun 29, 2012

Evergrande Stock Rises for Three Days After Successful Response to Short-seller

Jun 25, 2012

Evergrande Leading Domestic Real Estate Shares in a Surge on a Falling Market Thanks to Ranking Sustained by Fitch and Support Given by Big Name Investment Banks

Optimistic in Fundamentals of Evergrande — A Number of Investment Banks Give Their Support

Jun 24, 2012

Eight Famous Investment Banks Support Evergrande to Dispel Rumors Spread by A Short Seller

Jun 23, 2012

Investment Banks Join Hands to Support Evergrande In the Counterattack Against the Short Seller

Jun 22, 2012

Short-Seller Starting a Rumor Against Chinese Funded Leading Stock for a Profit; Evergrande Counterattacking to Regain Stock Price

Of course, several of these press releases seem to be telling the same story over and over again, but perhaps when you are in a war pouring a bit more ammunition at the enemy can be helpful.

While it seems unlikely at this point that Citron’s move against Evergrande will lead to the property developer’s collapse, it has led credit rating firm S&P to downgrade the company’s outlook to negative and to give it a “BB” rating. According to S&P,

Evergrande’s funding costs may have increased due to the fraud allegations by Citron Research. Our view is reflected in Evergrande’s equity and bond prices, which have weakened since Citron’s report was made public last Friday. Confidence in Evergrande may take time to recover, and lenders and investors may demand higher funding costs until the company can achieve good financial performances.

And the credit bureaus are not the only people who are concerned about Evergrande. While there are questions regarding whether or not the company has been involved in fraud as Citron contends, by listing in Hong Kong, Evergrande is marketing its shares internationally, and given the dodgy practices common at many Chinese real estate developers, the extra attention that they are getting is not likely to do them any good. Just take a look at the trend in Google searches for Evergrande over the last 30 days:

While there are a number of opinions on the accuracy of the Citron report, but the attention that it is bringing to Evergrande, and the increased skepticism about its business practices that are likely to result, will be a burden for the developer until it is able to score some very public wins and quiet its critics.