What happened
Shares of beleaguered Chinese property behemoth China Evergrande Group (OTC:EGRN.F), as well as the China Evergrande Group (OTC:EGRN.Y) American depositary receipts, popped early today, rising 2.8% and 9.1%, respectively, as of 9:35 a.m. EDT on Monday.
Sadly, investors may be misinterpreting today’s Evergrande news, and making a mistake that will cost them dearly.
Image source: Getty Images.
So what
As Reuters reported this morning, China’s Central Bank has “vowed to protect consumers exposed to the housing market … and injected more cash into the banking system [in an effort] to contain contagion risks from ailing developer China Evergrande.” On the surface, this seems like good news for the Chinese economy and the global economy at large. But it’s not necessarily good news for investors in Evergrande.
Australia’s News.com reports that Chinese authorities are quietly warning of Evergrande’s imminent demise. Meanwhile, CNN reports that China Evergrande New Energy Vehicle Group (OTC:EVGR.F), the company subsidiary that’s trying to build electric cars, “is having trouble paying suppliers and has called off plans to sell new shares,” sparking a 30% sell-off in its stock.
Now what
Whether the Chinese government manages to step in and save the economy or not, things are looking grim for Evergrande stock itself. Last week, the company failed to make an $83.5 million coupon payment on one of its dollar-denominated bonds. Another interest installment comes due on Wednesday this week, followed by more in the weeks to come.
Each payment that comes due gives Evergrande a chance to change the story: to surprise the markets by pulling a rabbit out of its hat and making a payment that it’s expected to miss — which would presumably give further boosts to the share price. However, if the Chinese government expects Evergrande to manage that, it seems unlikely that it would be warning of the company’s demise.
And if Evergrande ends up missing more interest payments than it hits, chances are this stock will fall right back down again.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
