Singapore's largest lender picks 5 stocks that play off Evergrande's debt crisis

Published Thu, Jul 29 20217:30 PM EDTUpdated Thu, Jul 29 20218:46 PM EDT

As embattled property developer China Evergrande Group seeks to solve its debt troubles, Singapore's DBS Bank explains how to invest for two possible outcomes. Evergrande, one of China's largest property developers by sales, has been plagued for months by debt concerns as authorities attempt to cool the real estate market with new restrictions. The uncertainty has pummeled Evergrande shares. As of the Thursday close, Evergrande's stock in Hong Kong had fallen more than 60% year to date. The most recent plunge came after the firm announced it would it would cancel a proposed special dividend . Major credit ratings agencies also downgraded Evergrande earlier this week as concerns over Asia's junk bond sector rise. Likely scenario Still, DBS currently has a 12-month price target of 22.94 Hong Kong dollars per share for Evergrande, representing nearly 300% upside from where the stock closed on Thursday. "We believe Evergrande should be well capable of servicing its outstanding debts in full via asset disposals, raise funds via spin-off of various of its businesses, and to sell existing stakes in their subsidiaries. However, this is based on the assumption that Evergrande has sufficient time to execute the above processes," analysts at DBS Group Research wrote in a Monday report. In this scenario, things would likely remain "largely status quo and end in a more orderly and controlled manner," the analysts said. Larger property developers with stronger balance sheets are expected to benefit as they "continue to extend their advantages from their financial strength" and stand out from the crowd, the analysts said. DBS' stock picks under this scenario were: Country Garden : Target price of 12.45 Hong Kong dollars per share (56.21% upside from its Thursday close) China Resources Land : Target price of 49.60 Hong Kong dollars per share (77.78% upside from its Thursday close) Longfor : Target price of 57.65 Hong Kong dollars per share (about 47.07% upside from its Thursday close) Alternative scenario In DBS' second scenario, Evergrande would not have enough time to resolve its situation and thus fail to fulfil its debt obligations. "This will likely create a short-term shock to the market that will likely impact the overall supply chain of the property development sector and thus meaningfully affect other developers as well," the analysts wrote. They added that the Chinese central government may have to ease restrictive policies and kickstart a round of loosening measures to cushion the blow. This could potentially delay Beijing's goal of controlling risks and stabilizing property prices. Under this scenario, DBS recommended staying with names such as Sunac and Zhongliang , which have seen their share and bond prices affected by recent developments surrounding Evergrande. DBS' 12-month price targets for the two are: Sunac: 47.50 Hong Kong dollars per share (representing 125.65% upside from its Thursday close) Zhongliang: 5.93 Hong Kong dollars per share (representing about 36% upside from its Thursday close)

The Emerald Bay residential project developed by China Evergrande in the Tuen Mun district of the New Territories in Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

As embattled property developer China Evergrande Group seeks to solve its debt troubles, Singapore's DBS Bank explains how to invest for two possible outcomes.