Hongqiao Appoints Third Audit Firm for 2016 Financials

Hongqiao Appoints Third Audit Firm for 2016 Financials

The next chapter in the ongoing saga surrounding China Hongqiao Group’s yet-to-be-released 2016 financials was revealed yesterday in the form of a press release announcing the engagement of the third auditing firm to be charged with the task.

Hongqiao filed the announcement with the Hong Kong Stock Exchange yesterday, naming Shinewing (HK) CPA Limited as the firm’s new auditor, replacing Baker Tilly in the role. Baker Tilly replaced Ernst & Young in late April after E&Y recommended that an independent investigation be carried out against withering accusations by short seller Emerson Analytics that the firm is grossly over-valued and hiding substantial amounts of debt. However, Hongqiao says that investigations carried out internally didn’t deliver results that would justify an outside investigation. Instead, Hongqiao’s board hired Baker Tilly Hong Kong Risk Assurance Limited (BT Risk Assurance), a little known firm, to carry out investigations regarding the audit findings made by Ernst & Young.

According to Hongqiao, the draft reports prepared by BT Risk Assurance are nearing their finalized form. However, Hongqiao says that Baker Tilly’s existing client workload, coupled with the sizable task of compiling Hongqiao’s 2016 numbers, made it highly unlikely that BT would be able to complete the long-awaited report in a timely manner. Hongqiao went on to indicate that BT did not begin work upon or assign personnel to the task prior to the announcement.

Shinewing’s appointment as Hongqiao’s auditor is immediate and will continue through the completion of Hongqiao’s next annual meeting. No specific date was given for the completion of the 2016 financials, but Hongqiao assured investors that the task will be completed and the firm’s shares will resume trading “as soon as possible.”

On April 28, Hongqiao released a set of unaudited first quarter financial results, showing a net profit of US$258 million (RMB 1.781 billion), and assets of US$17.3 billion (119.6 billion RMB). Shares in the firm haven’t traded on Hong Kong’s exchange since March 22 when the latest allegations against it were made public and the company’s stock dropped as a result, leading to Hongqiao’s request for suspension of trading.

Though progress is being made on Hongqiao’s 2016 books, the firm is scarcely out of the woods. Only recently it was turned down for membership on the Shenzhen Stock Exchange on account of CNY10 billion in corporate bonds that are due to mature by the end of the year. In addition, Hongqiao is in the process of being removed from the Hang Seng Index and the Stock Connect Scheme due to its months-long absence from the trading floor. However, Hongqiao continues to consider CITIC’s offer to buy a ten-percent share in the firm, which has been extended to mid-September.

Experts believe Hongqiao may be teetering on the brink of insolvency if it fails to release audit findings by the end of next month, as failing to do so places the firm at risk of defaulting on US$700 million in USD syndicated loans. In addition, failure to resume trading by the expiration of CITIC’s offer on September 20 would put the firm’s purchase offer in serious jeopardy.