In the past week, six developers, including major international borrower China Evergrande, have EGRNF -2.33%
Group and Kaisa Group Holdings GmbH.
, said they could not release the annual audited results by the Hong Kong deadline of March 31, with some citing issues related to the pandemic as one reason for the delay. Others have recently parted ways with the accounting firms that previously audited their books.
The information vacuum could further damage confidence in the sector, which is already near bottoming out following slumps in sales, a spate of defaults, broken promises to investors and revelations of previously hidden debt at numerous real estate companies.
“It’s never a good sign when companies miss filing deadlines,” said Paul Gillis, professor of practice at Peking University’s Guanghua School of Management in Beijing. “We probably have many companies that are having problems as a going concern and the company and the auditor can’t agree on what to report.”
So-called going-concern warnings are issued by auditors when they have concerns about a company’s ability to survive for at least 12 months.
Since the companies released first-half results for the six months ended June 2021, shareholders have not had a proper insight into the financial health of most developers, although monthly updates of contracted sales have painted a bleak picture in the meantime.
The lack of timely disclosures by developers “can exacerbate investors’ concerns about their financial health and liquidity and further weigh on their already weak access to finance,” Moody’s Investors Service’s Kaven Tsang, Alfred Hui and Franco Leung wrote in a research note.
As a general rule, failure to publish audited results in a timely manner would result in holdings being suspended. However, a spokesman for the city’s stock exchange operator, Hong Kong Exchanges & Clearing Ltd., said it would follow a Covid-19-related procedure put in place in 2020, allowing companies to continue trading if they remain open by March 31. The exchange recognizes the difficulties some market participants continue to face in the pandemic situation,” he said. Some of the six developers plan to release unaudited numbers soon.
Evergrande EGRNF -2.33%
said on Tuesday, when it and two key subsidiaries said they were delaying findings, that “drastic changes in the operating environment” had prompted the introduction of a large number of additional audit procedures. A Hong Kong-based spokesman for auditor PricewaterhouseCoopers declined to comment, citing the company’s policy towards its clients.
In October, Hong Kong’s Financial Reporting Council said it was reviewing the audit of PwC and Evergrande‘S
current accounts after identifying going concern reporting issues.
That signaled that regulators were monitoring whether previous audit work was sufficient after many problems with hidden debt were uncovered in the second half of last year, said Edward Chan, a director at S&P Global Ratings. Chartered accountants for real estate companies “now have to do a lot more work to meet their audit requirements,” Mr Chan said.
PwC has resigned as auditor of Ronshine China Holdings GmbH.
last week and said it needed more clarity on pledging bank deposits, according to a filing by Ronshine.
Chartered Accountant with Hopson Development Holdings since December GmbH.
China Aoyuan Group Ltd., Sinic Holdings Group Co., Yuzhou Group Holdings Co. and the onshore entity of Shimao Group Holdings Ltd. have also resigned.
Developers who switched auditors “have lost their credibility with the capital markets,” said Jizhou Dong, head of China real estate research at Nomura. “Even if they manage to report annual results after the change of auditors, the markets will question the reliability of their financial data.”
write to Clarence Leong at firstname.lastname@example.org and Cao Li at email@example.com
Corrections & Enhancements
Alfred Hui is an analyst at Moody’s Investors Service. In an earlier version of this article, his name was misspelled as Hiu. (Corrected on March 23, 2022.)
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https://www.wsj.com/articles/chinas-ailing-developers-delay-results-as-audits-drag-11648037786?mod=rss_markets_main China’s struggling developers are delaying results as audits drag on