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Doubling your frozen capital, Hong Kong style

| Aug 17 08:30 | 2 comments | Share

Jennifer Hughes in Hong Kong

And then there was $29bn in frozen capital. When we last calculated the equity value of long-suspended Hong Kong stocks in July, it came to just $12bn. News from the biggest of the new entrants to the HK freezer is not exactly lifting the tone of the group, either. Last Friday, Tianhe Chemical, with $3.7bn in market cap, warned its auditor is planning to “disclaim” its opinion of the group’s delayed 2014 accounts while the auditors for Sihuan Pharmaceutical, which provided $5.9bn of the added frozen equity, did exactly that in its (also delayed) accounts, also published last week.

The Hong Kong Stock Exchange is not alone in allowing stock suspensions, but it is unusual in letting them drag on. One company on its prolonged suspension list, which starts after 3 months of not trading, hasn’t traded since 2009. Others, such as the SCMP Group , haven’t traded in two-plus years even though all the Hong Kong newspaper publisher needs to resolve is a too-low free float.

Tianhe and Sihuan, both suspended since March, are investments of Morgan Stanley Private Equity. MS declined to comment.

In essence, disclaimers are issued when auditors cannot get enough information to get comfortable about tricky issues. And we should say that both Tianhe and Sihuan Pharma have pledged to work with auditors and others to resume trading as soon as possible.

Tianhe said on Friday that the short attack of last September had “heightened the risk sensitivity” of its auditor – Deloitte in its case – who in spite of extra time and extra work, still sought extra information on some issues.

The short attack raised investor sensitivity too: the stock had previously been a market darling, rising one-third from its June 2014 float. Between the attack from Anonymous Analytics and its March suspension, it halved.

Sihuan Pharma suspended itself and delayed its report after an “external query” (it has not said from whom) over how it accounted for some marketing and promotional services. In its 2014 annual report, published last week, its auditor PwC spent 7 pages (2, last year) explaining its disclaimer and what information it couldn’t get.

Even publishing the accounts won’t get Sihuan trading again though: the company revealed earlier this month that the HKEx has demanded it bring in an independent forensic specialist to look into the issues and publish that report.

With Sihuan unlikely to get going soon, the pool of frozen capital will very soon nearly double again.

Hanergy Thin Film, the solar equipment maker whose shares spectacularly collapsed in May but is still nominally worth $21bn, is due to join the list when it is next published early in September.

Earlier in August the Hong Kong Securities and Futures Commission formally suspended HTF, quashing any hopes it could resume trading any time soon as an investigation into its business continued.

HTF responded that it could not compel its majority owner, Hanergy Holding, a privately-held company owned by Li Hejun, HTF’s chairman , to produce the information the regulator required.

The notice to the exchange was signed by Mr Li.