Hollysys Stock Tanks 29% on Late Annual Report, Auditor Change

The stock in HOLI plunged back to the level it was before the buyout offer.
Nov. 03, 2021 21:04
Hollysys Stock Tanks 29% on Late Annual Report, Auditor Change

(CapitalWatch, Nov. 3, New York) Hollysys Automation Technologies Ltd. (Nasdaq: HOLI) was the biggest loser among Chinese stocks on Wednesday in New York after the company announced it hired a new auditor and will be late on its annual report.

HOLI shares plunged 29% to $13.70 apiece by the afternoon – the lowest the stock has traded since late July. The sharp decline followed two SEC filings by Hollysys: the report of a change in auditor and the notification of inability to timely file 20-F, the annual report for the year ended June 30, 2021.

Union Power HK CPA Ltd. replaced Ernst & Young Hua Ming LLP as Hollysys' new independent registered public accounting firm. The late filing of the annual report was attributed to "the delay in collecting supporting documents and information."

Hollysys noted that there were no disagreements with Ernst & Young on its audit of the previous year. Ernst & Young has provided services to Hollysys since June 2012. As China limits the tenure of service of an auditor engaged by a financial enterprise to eight years, the fiscal year 2020 was the last that Ernst & Young could legally serve Hollysys.

Last year, Ernst & Young made headlines as the auditor of Luckin Coffee (OTC: LKNCY). The Chinese coffee chain, a rival to Starbucks (Nasdaq: SBUX) in the nation, was found to have inflated its sales in 2019, and the accounting firm said it first called out on the fabricated transactions, as reported by The Wall Street Journal.  

PCAOB Inspection Casts Shadow (Not on Hollysys)

Meanwhile, the countdown on the delisting of Chinese companies from New York stock exchanges began last month should the firms refuse to open their books. In late 2020, Donald Trump signed off on the Holding Foreign Companies Accountable Act, which gave foreign companies three years to provide PCAOB access to their records as well as disclose any ties with foreign governments. In early October, the Act was set into effect.

Further, the time to comply with PCAOB inspection may be shortened to two consecutive years from three. In June 2021, the Senate passed an acceleration of the Act (AHFCAA) – if passed, China and the U.S. may see a much quicker decoupling in the markets.

And while Beijing has done a great deal over the past few months to limit the transfer of data overseas and safeguard its information, it has also signaled a readiness to cooperate to resolve cross-border accounting issues. On its end, China's State Council vowed to crack down on financial fraud and increase oversight of accounting firms – and there were a number of investigations in the Chinese markets recently that delayed about 40 IPOs including that of BYD Semiconductor Co.

As to Hollysys, the PCAOB inspection shadow may not be such a threat after all. The company is evaluating a buyout proposal involving its former managers. In early August, Hollysys disclosed a privatization offer of $23 per share from the retired founder of Hollysys, Changli Wang. 

The offer was a significant premium to the $17.10 per share proposed earlier by the company's former chairman and CEO, Baiqing Shao. This offer has been rejected by Hollysys in a move that Shao has disputed in court along with his removal from chairmanship early this year and certain amendments to the company's memorandum and articles. In September, Hollysys reported that Shao's claims were rejected by the court.

Should Hollysys accept a buyout offer, it will delist from the Nasdaq exchange ahead of the U.S. inspection deadline.