Dozens of Hong Kong-listed companies saw trading in their shares suspended Friday, after they missed a deadline to file their financial figures. Around one-third of the problem listings are in the property sector, demonstrating its deepening distress.
In all, 35 companies halted Hong Kong trading today. Many of the companies blame the Covid-19 pandemic for problems producing their annual reports. But it also raises "red flags" when accountants quit or baulk at signing off on company accounts, as I explained on Wednesday.
The problems also compound each other. The ratings agency Fitch blamed problems at the companies in preparing financial results when it on Tuesday downgraded the mainland property developers Sunac China Holdings (HK:1918) and Ronshine China Holdings (HK:3301). That cuts into their ability to raise cash.
Hong Kong's listing rules require public companies to produce annual figures within three months of their fiscal year end. So yesterday was the deadline for companies that had a calendar year end. The Hong Kong Stock Exchange must under normal circumstances require a suspension of trading if the deadline lapses.
The Hong Kong stock market did give companies a Covid-linked break, with the exchange allowing them to file unaudited results by March 31, so long as they are then able to provide the audited version by April 30.
Close to 200 companies filed unaudited results this year, compared with just 27 in 2021 and 380 in 2020, when the pandemic first hit. Even that has proved beyond many companies in 2022, with property developers having particular trouble making sense of their accounts.
The stocks suspended on Friday including major developers Shimao Group Holdings (HK:0813) and (SIOPF) , Sunac, Kaisa Group Holdings (HK:1638), Fantasia Holdings Group (HK:1777), Modern Land (HK:1107), China Aoyuan Group (HK:3883) and Sunshine 100 China Holdings (HK:2608).
China Aoyuan said it would not take advantage of permission to file unaudited figures. With the reporting not ready, management can't yet calculate the "provision for impairment," the company said in its filing. Unaudited results "may not be an accurate reflection" of the group's financial performance, it explained.
The would-be electric-car maker China Evergrande New Energy Vehicle (HK:0708) also had its shares halted. The company has yet to make a saleable vehicle, and hasn't been able to prepare its accounts.
It's a subsidiary of China Evergrande Group (HK:3333) and (EGRNF) , once the largest developer in China, which already has its own shares and those of its property-management arm suspended since March 18. That's after Evergrande Property Services Group (HK:6666) discovered a US$2.1 billion hole in its accounts while readying its annual results, details I dug into on Wednesday.
A flurry of companies did also scurry to file accounts on Friday, with companies such as packaging supplier Hop Fung Group (HK:2320), furniture supplier Royale Home (HK:1198) and magazine publisher Meta Media Holding (HK:0072) taking advantage of the leeway offered by filing unaudited numbers.
There are explicit calls of distress. The developer Yuzhou Group (HK:1628) says on Friday that is calling in bankers and lawyers to negotiate with offshore creditors for its survival. That translates into corporate-euphemism speak as a desire "to explore all feasible options to pursue a holistic solution to the current situation with a view to securing the long-term future of the company for the benefit of all stakeholders."
And there are subtler signs of trouble. Audit resignations have become increasingly common in the property sector, with auditors not comfortable signing off on what the company presents. Ernst & Young resigned as Yuzhou's bean counter, while PricewaterhouseCoopers has resigned as the auditor of Hopson Development Holdings (HK:0754), Ronshine and Shimao. Deloitte cut ties with China Aoyuan.
Both Fitch and rival rating agency Standard & Poor's express unease about sudden changes in auditor. "S&P Global Ratings believes that changing accounting firms just ahead of year-end results raises questions about the quality of a firm's governance," S&P says. It at least demonstrates a lack of internal control, possibly worse issues in how losses and debt are being reflected. "We anticipate more developers may face this problem as auditors push back on opaque practices such as the use of off-balance-sheet debt."
Aware that there's a spotlight of scrutiny on the Chinese property sector, not least from regulators in Beijing, accountants are being particularly careful in handling the results of real-estate developers this year.
Last year, there were 57 companies from all sectors that failed to report results on time in Hong Kong. The pandemic was a year old at that stage; only nine failed to file on time in 2020.
This time around, there has been a genuine emergency. Hong Kong was hit by an extremely heavy wave of Covid infections in late February and early March. Official Covid cases has run past 1.15 million in this city of 7.4 million, but Hong Kong University modeling suggests half the population may have caught the disease.
But the doubts over the transparency and accuracy of companies in their reporting are not settling investors, who are nursing sharp portfolio declines.
Hong Kong's stock market was the world's worst performer last year, with the Hang Seng Index falling 14.1%. It's only amplified that with a 5.3% fall to date this year, and sits now at levels last seen in 2016, producing a 9.2% loss over the last five years.
Hong Kong stocks gained 0.2% today, regaining their composure after a 1.8% descent at the open, when the trading halts went into effect. Still, Hong Kong underperformed the 1.3% gain in mainland Chinese shares.
We've also seen property deals and sales fall through as a result of the downturn in the property market. On Friday, Greenland Hong Kong (HK:0337), the offshore-listed arm of the state-owned developer Greenland Holdings (SH:600606), said it was abandoning a HK$595 million (US$76 million) joint venture with the Chinese developer Guangdong SPG in the southern megacity of Guangzhou. It blamed the "downtrend" and poor sentiment in the Chinese property market, leading to a fall in residential sales and tightening credit at developers.
Greenland, which is 46.4% owned by the government of Shanghai, was one of the most-acquisitive Chinese developer internationally in the middle of last decade, buying into the four-skyscraper Metropolis redevelopment in downtown Los Angeles and a 70% stake in the Pacific Park Brooklyn megaproject in New York City. But it has recently been in retreat, selling off the site of a US$2 billion project in San Francisco without ever breaking ground, as well as two undeveloped phases of the Ram Quarter redevelopment in southwest London.