Evergrande Shares May Tumble in Dramatic Sell Call, UBS Analysts Say

(Bloomberg) — China Evergrande Group was downgraded to sell by UBS Group AG analysts, who said shares of the world’s most indebted developer may lose more than half their value.

UBS cuts its previously neutral Evergrande rating Jan. 12, according to a research report led by analyst John Lam and seen by Bloomberg. The bank slashed the 12-month target price to HK$6 ($0.77) from HK$15.20 set in September. The target is 59% lower than Evergrande’s closing price Wednesday.

Evergrande shares fell 0.1% to HK$14.48 Thursday, the lowest this week.

UBS expects Evergrande’s contract sales to decline by 2% to 707 billion yuan ($109 billion) this year, according to a separate Jan. 6 report on the developer’s property management unit. Last week, Evergrande said it aimed to reach 750 billion yuan of contract sales in 2021 — 50 billion yuan lower than the target set by Chairman Hui Ka Yan three years ago.

UBS didn’t immediately reply to a request Thursday for comment. Evergrande said in a written response that the UBS estimate had no factual basis and the company is confident it will reach its 2021 sales target.

The UBS report underscores investor concerns that Evergrande’s debt-cutting efforts may force it to prioritize cash flow over profitability. Evergrande’s deleveraging strategy and tight liquidity may lead to limited growth potential and uncertainty, the bank’s analysts wrote.

UBS estimated that Evergrande’s earnings per share will decline to 1.11 yuan in fiscal year 2020 before rebounding to 1.24 yuan in 2021. That would still be lower than 1.86 yuan in 2019.

At the same time, the bank said Evergrande would probably satisfy one of three debt requirements imposed by China’s regulators by June 30. Developers must keep their debt ratios from crossing three “red lines” to qualify for increased borrowing. Evergrande’s latest financial figures suggest it breached all three. Coming into compliance with one of the metrics may mean Evergrande could expand its debt by 5%, according to the rules.

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