China Builders Fall as Hopson Stokes Fear of Auditor Exodus

(Bloomberg) -- Fresh signs of contagion are rippling through China's property industry, with a spate of auditor resignations deepening concerns about developers' financial health in the run-up to earnings season.

Investors moved to pare risk exposure on Friday after Hopson Development Holdings Ltd. said its auditor PricewaterhouseCoopers resigned after receiving insufficient information to complete auditing procedures. Hopson Development's dollar bonds were on pace for record declines, while its shares fell the most since 2009. China's high-yield dollar bonds dropped at least 3 cents on the dollar, according to credit traders.

There are mounting worries that earnings season will expose a fresh set of risks for China's beleaguered developers. Earlier this week, China Aoyuan Group Ltd. said Deloitte Touche Tohmatsu Ltd. resigned as an auditor for the company. They were unable to reach a consensus on the audit fee partly because of additional procedures needed in light of the firm's liquidity issues, it said. Shimao Group Holdings Ltd.'s onshore unit also announced it would change its auditor for the first time in 27 years.

A Bloomberg Intelligence gauge of Chinese real estate developers dropped as much as 2.2% Friday in a fourth day of losses, on pace for its worst week since November.

“PricewaterhouseCoopers (PwC)'s sudden resignation as the auditor of Hopson, a relatively strong China property developer, could kickstart the mass resignation of other auditors,” Bloomberg Intelligence analyst Andrew Chan wrote in a report.

The firm's reasons for resigning “could have serious ramifications for the Chinese property sector,” Chan added, noting that any similar moves could spur further equity and bond price volatility and increase risk of reporting delays.

Hopson Development said in its Thursday filing that PwC had not obtained information including “the accounting treatment of certain of the Group's equity investments and property projects and the valuation of the Group's investment properties.” It plans to announce the appointment of Ernst & Young as its new auditor before the Lunar New Year holiday, REDD reported.

Hopson Development and PwC declined to comment when contacted by Bloomberg on Friday.

Across the sector, earnings delays are seen to be likely as auditors review developers' cash flow and liquidity, Citi analysts wrote in a Monday note. A lack of visibility complicates auditors' accounting and reports are likely to be released on March 31, the last day required by the Hong Kong exchange. The sector already faces worries about the transparency of even better developers and fears about the sector's hidden debt.

PwC Kickstarts Possible Mass Quitting of China Property Auditors

Hopson Development was once seen as relatively immune to a real estate crisis sparked by a government crackdown on excessive borrowing by builders. Its dollar notes traded close to par last month. The firm's note due 2023 fell 9.1 cents on the dollar to 83.1 cents, set for its biggest drop on record, according to Bloomberg-compiled prices. Its shares fell as much as 31%, before paring the decline to close down 17%.

Hopson Development and its subsidiaries have $880 million in outstanding offshore notes, including a HK$720 million ($92.4 million) due July, Bloomberg-compiled data show.