Los Angeles-based Citron Research, an online research organization, released a report accusing Chinese property developer, Evergrande Real Estate Group, of committing fraud to hide the company?s decline.
Evergrande Real Estate Group is one of the largest real estate developers in China and the second-biggest property developer by sales. However, recent reports say that its shares went down 11% in Hong Kong, leading industry professionals to look into the issue to know whether Citron Research presented facts or not. Evergrande defended its side by issuing a statement to the Hong Kong Stock Exchange, denying the allegations stated in Citron?s report and promising further clarification announcement in due course.
The Chinese property developer is said to be one of the companies that rose to prominence despite rough times for Chinese real estate stocks last year. But according to Citron Research, the information in their analysis report that was compiled over several months, eventually led them to the truth about Evergrande?s ways.
The report accused Evergrande of using fraudulent accounting, overstating its cash, inflating the value of its assets and under-reporting the cost of land. Citron also added that the company abused the generous lending of the Chinese government making Hui Ka Yan, its founder and chairman, a very rich man.
The Citron report also claimed that Hui Ka Yan directed $2.5 billion of the company?s money into unprofitable ventures like the Guangzhou Evergrande, a football team that is overly funded and the Evergrande Real Madrid Football Academy project, which was supposed to be the world?s greatest football training school.
Apparently, Evergrande isn?t the only company that Citron accused of committing fraud. The firm has released reports with similar allegations on over a dozen other companies in China. But this 57-page report alarmed traders and investors. The morning after the report was released Evergrande?s share price declined, losing 19.6% of its value in just 45 minutes.
But despite accusations, some businessmen found that ?Citron?s allegations are at odds with the consensus among analysts covering the stocks in Hong Kong, because most of them rate it a ?buy? or ?outperform.? There was even a report from the State Council, Tsinghua University and the China Index Academy, praising Evergrande for being the top real estate H-share for two years in a row.
But Citron remains loyal to the ?facts? they got. They even stated that even China?s finance ministry found proof of material accounting fraud at Evergrande, which led the company to pay a fine for providing inaccurate information on its 2009 financial statement.
Many financial analysts believe that Citron is going on the same path as Muddy Waters Research, which exposed Sino-Forest for its fraudulent ways and eventually led the company to file for bankruptcy a year after being accused of overstating its timber holdings in China.
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