At least 33 Hong Kong firms halted after earnings deadline

[HONG KONG] Trading in at least 33 Hong Kong-listed stocks was halted on Friday (Apr 1) after a number of firms missed a deadline to report annual results, adding uncertainty to a market grappling with a bleak economic outlook and regulatory headwinds.

Embattled Chinese developers, including Sunac China Holdings and Shimao Group Holdings, were among the stocks to be suspended from Friday. China Aoyuan Group said publishing unaudited results at this stage could "potentially be misleading to the shareholders and potential investors". This year's number compares with more than 50 for 2021 and at least 9 for 2020.

The barrage of trading halts comes at a bad time for the city's equity market. China's repeated vows to stabilise markets have failed to restore investors' confidence, keeping the Hang Seng Index down 6 per cent this year.

Regulatory risks still hang heavy and lockdowns in China are weighing on the earnings outlook. This earnings season had been expected to be the worst in a decade for Chinese developers beset by a credit crunch, and failure for the firms to come clean on time - as well as a slew of auditor resignations - will only worsen sentiment.

Uncertainties over financial transparency may also bring further credit rating downgrades. "It is an open secret that auditors adopt very strict requirements for Chinese developers' audit work this year due to the sector's liquidity issues and default problems," said Raymond Cheng, head of China/Hong Kong research at CGS-CIMB Securities.

Still, the earnings delays "could hurt improving market sentiment from supportive policy". Trading suspensions in Hong Kong can take place due to various reasons. In terms of earnings, a company's shares will be halted if it doesn't release audited results 3 months after the fiscal year ends, according to exchange rules. However, due to Covid-related delays, firms have been allowed to submit unaudited figures by Mar 31 and file the audited version by Apr 30 to avoid suspension.

At least 138 firms had previously said they would postpone the release of their audited 2021 results past the Mar 31 deadline. The exchange had 2,570 listed companies as of end-March.

Credit downgrades

Audit problems were a "key driver" for recent downgrades of Sunac China Holdings and Ronshine China Holdings, Fitch Ratings said this week. Potential credit rating cuts following the earnings delays are likely to trigger requests for early debt payments, and "add to their default risks", said Dean Xiao, flow credit high yield desk analyst at Guotai Junan International Holdings.

A prolonged trading halt increases the risk of wild stock moves upon resumption. Among last year's cases, China Huarong Asset Management Co, which was halted for 9 months, sank 50 per cent when trading resumed. GCL-Poly Energy Holdings surged 82 per cent after a 7-month halt.

Companies could also be booted from MSCI's stock indexes within 3 trading days if their suspensions last for more than 50 consecutive days, according to the index compiler. Such a decision could impact hundreds of billion dollars of passive funds that track related MSCI benchmarks. Huarong was removed from the gauges in June last year. BLOOMBERG