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Why China Evergrande Stock Soared 19% This Week

By Rich Smith – Sep 30, 2021 at 6:13PM

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As Evergrande misses deadlines, investors keep bidding the stock up.

What happened

Investors in Chinese real estate giant China Evergrande Group (EGRN.F -88.33%) and in its unsponsored American depositary receipts China Evergrande Group (EGRN.Y 22.86%) have had an exciting week.

First, shares rose 37.5% through Wednesday's close. Then they retreated 13.1% Thursday. Since close of trading last week, that works out to a net 18.8% gain for Evergrande stock.

Person examines a stock chart superimposed on a Chinese flag

Image source: Getty Images.

So what

Now ordinarily, if a stock gained 19% in a little less than a week, you'd think that it had some good news to report, but that hasn't been the case for Evergrande. To the contrary, since Friday last week, we've received confirmation that Evergrande has missed not one but two separate deadlines for paying interest on its debt, totaling $131 million in missed obligations.  

Granted, Evergrande is technically still within 30-day grace periods during which it can cure its defaults, which occurred on Sept. 23 and 29.

Also granted, Evergrande said on Wednesday that it has reached a deal to raise $1.5 billion from selling its stake in Shengjing Bank, which should give it the cash it needs to cure those defaults if it wanted to.

Now what

But here's the thing: Evergrande's total debt load isn't $131 million or even $1.5 billion -- but $305 billion. Although in theory, the company's $368 billion in assets (according to data from S&P Global Market Intelligence) should be enough to pay off that debt, the past week has shown us that theory and reality may be two very different things.

Evergrande is clearly not out of the woods yet, and until it demonstrates an ability to pay its bills, investors jumping into the stock may be jumping the gun.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

EVERGRANDE REAL EST Stock Quote
EVERGRANDE REAL EST
EGRN.F
$0.01 (-88.33%) $0.11
China Evergrande Group Stock Quote
China Evergrande Group
EGRN.Y
$2.15 (22.86%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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