(Bloomberg Gadfly) -- Short-sellers found that betting against debt-riddled property developers like Sunac China Holdings Ltd. and China Evergrande Group didn't end well.
They've retreated: Short interest on Sunac has fallen to 8.5 percent of the free float, from a high of 15.4 percent in July, according to IHS Markit Ltd. data.
But Sunac is no Evergrande: The latter is succeeding in deleveraging. Sunac is only starting, having bought non-core assets like theme parks purchased from Dalian Wanda Group Co. and spent $2.2 billion on shares of firms in the cash-strapped LeEco group, including Leshi Internet Information & Technology Corp.
Some of those forays soured quickly -- Sunac had to write down $1.1 billion yuan ($167 million) in the first half because of its Leshi stake.
Sunac's lack of discipline is also evident in its earnings, which at first glance look buoyant. Net income rose more than 1,600 percent to 1.3 billion yuan. But strip out one-time gains and the developer had a core loss of 530 million yuan in the six-month period, almost double the shortfall a year earlier, CIMB Securities Ltd. estimates.
While Evergrande borrowed on an epic scale in the last several years, much of the cash was spent wisely, on land in China's still-booming third-tier cities. Sunac has 91 percent of its land in Tier 1 and 2 metropolitan areas, according to Bloomberg Intelligence analyst Kristy Hung. The bigger cities are exposed to the government's efforts to tamp down an emerging housing bubble.
Sunac's land purchases have been smaller than Evergrande's, so it will benefit less from any upside. The acquisition of Wanda's theme parks helped redress the balance, but that land didn't come cheap. As of July, the latest month for which both companies have data, Evergrande's land bank was 175 percent bigger than that of Sunac.
That's why Sunac's debt levels should worry investors, a successful bond sale notwithstanding. It's now overtaken Evergrande as China's most indebted large developer, and is selling a lot less: Evergrande had 288 billion yuan in contracted sales in the year through July, double Sunac's $131 billion.
Sunac's net debt to equity has soared to 394 percent from 208 percent a year earlier, counting perpetual bonds as equity, according to CIMB. While Evergrande's leverage rose to 240 percent in the first half, the company has a more concrete plan to reduce it than Sunac, including bringing in strategic investors and selling its most plentiful resource, land.
On Friday, Sunac said it's suspending the acquisition of new land in the second half, and wants to reduce its leverage to less than 80 percent by the end of 2018 -- not necessarily good news when the land it's stuck with is away from the hot spots for price growth.
It gets worse: Chairman Sun Hongbin may have pledged a majority of his 49.7 percent controlling stake in the company, according to exchange filings collated by Bloomberg, an overhang if the stock were to fall so much that it triggered a margin call.
Investors have overlooked Sunac's thirst for debt, preferring to see it as play on China's housing bubble this year. Perhaps the shorts should have stuck around.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.