Trading halts loom, with Hong Kong firms set to delay earnings

HONG KONG (BLOOMBERG) - Hong Kong stock investors are bracing themselves for a key earnings deadline on Thursday (March31), with dozens of firms unable to file annual results facing a possible trading halt.

At least 73 listed firms said they will postpone their annual earnings filings past the March 31 deadline due to the Covid-19 outbreak or auditor changes, according to exchange statements as at 6pm local time on Saturday. That includes distressed builders China Evergrande Group and Kaisa Group Holdings ahead of what is expected to be one of the worst earnings seasons in more than a decade for developers. The list also includes a large amount of energy and materials firms.

The suspensions risk could hit trading sentiment in the city's equities market, which remains fragile following bouts of volatility in recent weeks as Beijing vowed to end a yearlong regulatory crackdown after a historic sell-off.

Under the Hong Kong Stock Exchange's listing rules, a company's shares will be halted if it does not release audited earnings three months after the fiscal year ends. However, due to Covid-19-related delays, firms are allowed to submit unaudited figures by March 31 and file the audited version by April 30 to avoid a suspension.

An exchange spokesman said that the bourse has been "actively communicating" with various stakeholders and continues to monitor latest developments. He added that they expect the "vast majority" of firms will be able to report their audited results by the end of this month.

Events last year may provide a clue of what lies ahead. A wave of earnings postponements led to more than 50 trading halts on April 1. Among them, bad debt manager China Huarong Asset Management was halted for nine months and sank 50 per cent when trading resumed in early January.

"We would be cautious on delayed results as it may indicate financial stress based on last year's experience with companies such as Huarong," said Bloomberg Intelligence analyst Marvin Chen.

While a delay in reporting may simply mean auditors need more time to complete their review of financial statements, the situation with Chinese property firms is particularly worrying. A least nine of the country's biggest builders by contracted sales last year are expected to miss this month's deadline.

The announcements have already started to weigh on affected stocks. Powerlong Real Estate Holdings fell 7.8 per cent on Friday after announcing a delay to its 2021 audited results late Thursday, compared with a 0.7 per cent slide in a Bloomberg Intelligence gauge of China developers. Kaisa shares have dropped 4 per cent since announcing a delay late on Tuesday.

The resignations of several auditors have raised a red flag on the companies' "weak corporate governance, financial management and planning, as well as transparency and information disclosure", according to Moody's Investors Service analysts.

All this is adding to the drag on Hong Kong equities after a roller-coaster ride earlier this month. The swings mirror the volatility in broader markets, which have been buffeted by concerns of accelerating inflation and slowing growth.

Hong Kong and China's recent Covid-19 outbreak is compounding the audit headaches, with the recent surge causing "the most serious disruption to the audit process for both Chinese and Hong Kong firms in the past three years", according to Hong Kong Association of Registered Public Interest Entity Auditors chairman Clement Chan.