Chinese property developers’ shares are under heavy downward pressure on Hong Kong markets after several said they may not be able to publish their annual results for 2021 as required by regulators by the end of March.
Heavily-indebted property developers including Evergrande Group, China Aoyuan Group, Sunac China Holdings and Guangzhou R&F Properties all recently announced that trading of their shares would be suspended from this Friday if they failed to publish their 2021 annual results on time.
Some companies blamed Covid-19 outbreaks in Hong Kong and the mainland for the delays, while others admitted they faced tougher audit procedures due to their liquidity problems.
After news media reported extensively on Evergrande’s financial difficulties last year, some accounting firms have become more cautious about signing off on 2021 annual financial statements for some developers. PricewaterhouseCoopers (PwC), one of the “big four” accounting companies, plans to gradually exit auditing Chinese private property developers, according to a recent REDD report.
Some lawmakers and accounting groups urged the Hong Kong stock exchange to allow some listed companies to delay the publication of their annual results so that trading of their shares would not be suspended on Friday.
In July 2020, China’s financial regulators launched what they referred to as “three red lines” that forbid highly-geared property developers from receiving loans for expansion. Since then, most Chinese property developers have failed to get new bank loans and as a result have suffered liquidity problems.
At the same time, homebuyers’ purchasing power was hurt by the slowing Chinese economy amid the pandemic, resulting in a property down cycle on the mainland in 2021.
Evergrande in trouble
Between last September and December, Evergrande saw its contracted sales drop 98% to only 4.37 billion yuan (US$686 million) from the same period in 2020. The Shenzhen-based company failed to pay its bondholders on December 6 and announced on January 26 that it would present an initial restructuring plan within the next six months.
As Evergrande’s failure to deliver apartments scared off homebuyers, other property developers also recorded a significant decline in their contract sales. Last December, contracted sales of Aoyuan, Shimao and R&F fell by about 30% from a year ago, while Agile, SCE, Times, Ronshine and Zhenro recorded 38-57% declines in December sales.
On March 21, trading of Evergrande’s shares, together with those of Evergrande Property Services and Evergrande New Energy Vehicle, was suspended. Evergrande’s shares last closed at HK$1.65 on March 18, down 89% from a year ago.
Evergrande later said in a stock exchange filing that it would not be able to publish its audited results for the year ended December 31, 2021, on or before March 31 this year due to a large number of additional audit procedures added by the drastic changes in the company’s operational environment since the second half of last year.
It also said the delay was caused by the Covid-19 outbreak in China and that it would publish its audited annual results as soon as possible.
On March 24, Powerlong Real Estate Holdings said PwC had resigned as the auditor of its financial statements for 2021. The company said PwC stated in its resignation letter that it had asked for further clarification about two bank deposits of Powerlong’s subsidiaries, while the supply of requested follow-up information, as well as the sending and receipt of confirmations on various bank and other account balances, had fallen behind schedule due to virus outbreaks on the mainland.
Powerlong said it had approved the appointment of Elite Partners CPA Ltd as its new auditor. It said it would not be able to publish its audited results for 2021 by this Thursday. Powerlong’s shares closed at HK$2.03 on Tuesday, down 23.4% from March 24.
Prior to this, PwC resigned as the auditor of Hopson Development on January 27 as it could not get sufficient information to complete its auditing procedures. Hopson appointed Ernst & Young as its new auditor.
Stocks in free fall
Other property developers that may not be able to publish their 2021 results on time include Sunshine 100 China Holdings, Kaisa Group, R&F Properties, Aoyuan and Sunac. Most Chinese property stocks fell on Monday and Tuesday as the trading of these shares could be suspended on Friday.
Meanwhile, R&F and Shimao issued profit warnings last Friday. Shares of Sunac fell 17.4% to HK$4.08 on Tuesday, while Shimao dropped 12.5% to HK$3.78. R&F declined 11.3% to HK$2.6, while Aoyuan decreased 7.3% to HK$1.01.
According to Hong Kong regulations, listed companies are required to publish their audited full-year financial statements within three months after their fiscal year ended and interim reports of financial statements within two months. Under such rules, many companies announce their full-year results in late March and interim results in late August.
On February 21, the Hong Kong stock exchange said in a statement that it would allow listed companies to announce their unaudited full-year financial statements by March 31, a practice that was adopted in 2020 when Hong Kong was hit by the first epidemic wave that originated from Wuhan, China.
Loretta Fong, president of the Hong Kong Institute of Certified Public Accountants (HKICPA) and a partner of PwC Hong Kong, told the SingTao Daily earlier this month that a lot of accountants tested positive for the virus and could not visit their mainland clients due to Covid-19 outbreaks.
She said the HKICPA had suggested to the stock exchange that listed companies should be allowed to delay their 2021 result announcements, but the suggestion was rejected by the bourse.
Infected accountants
Jennifer Tan, chairman of the Association of Chartered Certified Accountants (ACCA) and chief executive at Alipay Financial Services (HK) Ltd, told the Ta Kung Pao newspaper on Monday that many accountants could not work normally due to the pandemic.
Tan said the ACCA welcomed the stock exchange’s decision to allow listed firms to only publish their unaudited results by Thursday.
Robert Lee Wai-wang, a legislator representing the financial services functional constituency, said it was not possible for accountants to finish their audit work when they were forced to work from home.
Lee said the Hong Kong stock exchange should provide more flexibility to the companies that could not publish their 2021 results on time so the trading of their shares would not be suspended.
Read: Chinese property stocks fall after downgrading
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