Shares of HutchMed and four others named by US SEC’s audit list tumble in Hong Kong, Shanghai in knee jerk reaction to regulatory risks

On Mar 11, 2022 34

People walk before flags of CK Hutchinson Holdings outside the company’s headquarters in Hong Kong on March 21, 2019. Photo: AFP

HutchMed’s shares plunged by as much as 16 per cent to at least a 12-month low of HK$24.25, tracing the 15 per cent decline overnight in New York
Yum China Holdings, which runs the KFC and Pizza Hut fast food chains in China, declined by as much as 11 per cent in Hong Kong, after falling 15 per cent in New York

HutchMed, the pharmaceutical unit of tycoon Li Ka-shing’s flagship CK Hutchison Holdings, led declines among four Hong Kong-listed stocks after being named in a list of foreign companies liable to US accounting inspection law.

HutchMed’s shares plunged by as much as 16 per cent to at least a 12-month low of HK$24.25, tracing the 15 per cent decline overnight in New York. Yum China Holdings, which operates the KFC and Pizza Hut fast food chains in China, declined by as much as 11 per cent in Hong Kong, after its American depositary receipts (ADRs) fell 15 per cent in New York.

The stocks were the first of 270 identified by the United States Securities and Exchanges Commission (SEC) on a list of New York-listed companies liable to the Holding Foreign Companies Accountable Act (HFCAA), which took effect on December 18, 2020. Under the law, foreign companies may be delisted if they fail to submit their audit papers to a US accounting oversight body for three consecutive years.

The knee jerk reaction to the latest administrative action underscores how fragile investor sentiments are, amid a global surge of the Covid-19 pandemic’s Omicron variant, as well as the war in Ukraine, analysts said. The reason these companies were identified by the SEC was because they were the first to file their 2021 annual reports, China Renaissance said in a report after the New York rout.

“We expect renewed regulatory uncertainty to dampen investor sentiment and potentially remain an overhang on Chinese ADR valuations,” said Renaissance’s analyst Bruce Pang.

The latest sell-off rekindled fears of a mass delisting of US-listed Chinese stocks, estimated at US$1.3 trillion in combined market capitalisation. Already, several Chinese companies including China Mobile and China Telecom had been forcibly delisted from New York, albeit the results of a different regulation. The overhang may prompt more companies like the electric-car maker NIO – which began trading in Hong Kong yesterday – to seek a secondary market for trading their stocks, Pang said.

The SEC approved a framework in December to determine which US-listed Chinese companies fail to fully allow auditing inspection and, therefore, will be delisted from American capital markets. It will allow the Public Company Accounting Oversight Board’s (PCAOB), a non-profit entity that deals with accounting issues of public companies, to determine whether a delisting process needs to be triggered.

For Yum China, the move may be much ado about nothing, as it had already foreshadowed a plan to delist its ADRs from New York in 2024, “unless the [HFCAA] is amended to exclude the company, or the PCAOB is able to conduct a full inspection of the company’s auditor during the required time frame,” according to its filing to the Hong Kong exchange.

Under Chinese law, the China Securities Regulatory Commission (CSRC) is empowered to act as the bridge to provide Chinese auditing papers to foreign oversight agencies such as the PCAOB. The Chinese regulator has warned against security regulation being “politicised” amid wrongdoings by “some forces”, reiterating its commitment to communicate with the PCAOB in making Chinese auditing papers available.

For now, the companies on the SEC list are bearing the brunt of the sell-off. BeiGene, which develops immuno-oncology drugs, fell by as much as 11.3 per cent in Hong Kong, tracking its 16.6 per cent tumble overnight.

“We have been taking action; evaluating, designing and pushing forward extra-business processes since the passage of the HFCAA to meet related requirements,” BeiGene said, adding that it hopes to maintain its listing status in New York, Hong Kong and Shanghai. “The related work is actively advancing.”

Zai Lab Limited, a Shanghai-based developer of drugs for infectious diseases, plummeted by as much as 16.5 per cent, after its ADRs retraced by 23 per cent last night.

“The provisional identification does not mean that the company is about to be delisted by the SEC from Nasdaq,” Zai Lab said in a statement to the Hong Kong exchange, adding that it is hiring an independent accountant to meet the PCAOB’s requirements. “Delisting may only occur under the HFCAA if, for three consecutive years (or two consecutive years if the Accelerated HFCAA is passed), the company uses an auditor that cannot be inspected by the PCAOB.”

ACM Research, which produces electroplating equipment used in the semiconductor industry, fell by as much as 15.8 per cent in Shanghai after its ADRs fell almost 30 per cent. ACM did not immediately respond to a request for comment.

Author: Iris Ouyang, SCMP