Evergrande is the proverbial tip of the iceberg

Posted by Hamish Macalister
  • Transparently.AI flagged Evergrande problems as far back as 2010
  • Many more Chinese developers display risky accounting signals

China Evergrande Group (3333 HK) has filed for bankruptcy protection in the US. The company has been in great difficulties for the last few years as it struggled to digest substantial borrowing to fuel an acquisition spree.

Importantly, the Transparently.AI accounting manipulation risk system flagged Evergrande was in the worst 10% of Asia ex Japan stocks (and often the worst 5%) as far back as 2010.

The system doesn't tell you when a company is likely to collapse as a result of manipulation (or alongside manipulation), but history tells us it's usually within 5 years. In the case of Evergrande it took substantially longer as the market refused to give up on the company. Nonetheless, it has now gone into bankruptcy.

How many more Evergrandes are there out there? Our system identifies 175 Hong Kong and China-listed real estate companies with severe accounting manipulation risk scores. Twenty-one of those are among the largest 20% of stocks globally.

It's clear that there are some huge problems in this sector and more pain to come.