(Bloomberg) -- A Chinese real estate firm said Ernst & Young’s “strict” accounting standards were partly behind a collapse in the company’s profit last year.
Profitability was hurt because Yuzhou Group Holdings Co. was unable to include some projects on its balance sheet, Chief Financial Officer Steve Chiu said in an earnings call, according to people with direct knowledge of the matter. E&Y required additional information, which the company couldn’t provide on time, Chiu said, according the people.
The company’s shares plunged 8%, taking their decline from this year’s high to 26%. JPMorgan Chase & Co. cut the stock to the equivalent of sell from buy, saying the drop in profit shows the management’s “subpar ability” to manage earnings growth and a “potential corporate governance red flag” because some revenue booked in the first half was unwound by the auditor.
The company reported revenue of 10.4 billion yuan ($1.6 billion) for the full year, less than the 14 billion yuan booked in the first six months, according to company filings. Yuzhou said the decline in full-year revenue was mainly due to delays with projects in Shanghai, Wuhan and Tangshan as a result of the coronavirus outbreak.
The drop in revenue “suggests their first-half revenue probably needs correction and it also raised concerns about the quality of its earnings reports,” said Daniel Fan, a Bloomberg Intelligence analyst.
Yuzhou and E&Y didn’t immediately respond to request for comment.
Concern has grown about Yuzhou’s ability to repay its debts amid a government clampdown on leverage in China’s property market. Beijing’s “three red lines” campaign limits the capacity of highly indebted firms to raise fresh capital in the credit market. The risks to global investors were illustrated earlier this year when China Fortune Land Development Co. defaulted on a $530 million dollar bond.
Yuzhou’s dollar bonds maturing in 2025 and 2026 have fallen more than 20 cents on the dollar within the past two weeks to less than 85 cents. The bonds rose as much as 3 cents as of 11:35 a.m.
Moody’s Investors Service downgraded Yuzhou’s corporate family rating deeper into junk territory last week, cutting the grade to B1 from Ba3 and lowering the outlook to negative. The ratings agency cited uncertainty over the company’s ability to deliver pre-sold projects on time as credit conditions tighten. Yuzhou’s reliance on sales from joint ventures and associates limits its corporate transparency, Moody’s said.
While the firm had sufficient internal resources to cover its maturing debt and committed land payments over the coming year, its key credit metrics are expected to stay weak over the next 12 to 18 months, according to Moody’s.
Yuzhou is prepared to repay its debt coming due in a year and has set aside funding to pay off a 7.9% dollar bond maturing in May, the CFO said, according to the people.
Founded in the southern city of Xiamen in 1994, Yuzhou ranked 37th in China out of the top 200 developers by contracted sales, according to China Real Estate Information Corp. Yuzhou tapped international capital markets to help fund its expansion, with an initial public offering in Hong Kong in 2009. The developer is also a frequent borrower in the offshore debt market, with some $5.8 billion in dollar bonds outstanding, Bloomberg-compiled data show.
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