SHANGHAI: A top performing distressed debt investor says he’s avoiding China Evergrande Group, citing risks from the developer’s heavily discounted asset disposals and liabilities that may not be fully reflected in its balance sheet.

Zhang Zhijun, chairman of private fund manager Beijing DingNuo Investment Management Co, said his firm has not bought Evergrande bonds since May after its previous holdings matured.

Two of his company’s credit-focused funds have beaten 99% of peers this year, with one of them reaping a return of 84.7% as of Dec 17, according to Simuwang.com, a Chinese financial-data provider.

Those gains were made largely on bottom-fishing onshore bonds of distressed companies including China Fortune Land Development Co and chipmaker Tsinghua Unigroup Co, Zhang said.

His firm had more than 568 million yuan (US$89mil or RM375.04mil) in assets under management as of Tuesday.

“We once tried to gauge the recovery ratio of Evergrande onshore bonds, but we gave up buying them as it has excessive wealth management products and financing off its balance-sheet,” Zhang said.

Evergrande didn’t respond to requests for comment on its financing.

Zhang’s cautious view on Evergrande contrasts with more upbeat assessments from international distressed debt investors including Marathon Asset Management.

The developer was labelled a defaulter for the first time earlier this month after it missed making coupon payments on two bonds.

The company, which disclosed more than US$300bil of total liabilities as of June, has said it is “actively engaging” with offshore creditors on a restructuring plan.

Zhang says he will continue seeking investment opportunities in oversold distressed debt, particularly bonds with shorter duration, at a time when risks continue to simmer.

Long considered one of the industry’s healthier players, Shimao Group Holdings Ltd has recently seen its bonds tumble to record lows on concerns about payment difficulties.

Elsewhere Sunac China Holdings Ltd has also faced liquidity risk.

Any potential failure for those firms would test the survival abilities of bigger companies such as Country Garden Holdings Co, Zhang said.

Shimao, Sunac and Country Garden declined Bloomberg requests for comment.

China’s developers will continue facing difficulties amid a sales slowdown, Zhang said. A liquidity crisis has rippled through the sector, sparked by a government crackdown on excessive borrowing by builders and housing market speculation.

“Mutual fund houses and asset managers are dumping large amounts of onshore property developer bonds, which quickly slumped to record low levels,” Zhang said.

 - Bloomberg