PwC Resigns as Auditor for China Oceanwide Following Profit Warning

China Oceanwide Holdings Ltd (715:Hong Kong) has suffered a fresh setback just a week after the troubled developer warned of a substantial drop in profits for 2018 with its auditor, PriceWaterhouseCoopers, having resigned on February 22.

The London-based accounting giant was replaced by Shanghai’s BDO China Shu Lun Pan, which currently serves as the auditor of China Oceanwide’s parent firm, Shenzhen-listed Oceanwide Holdings (000046.SZ), according to a company statement submitted to the Hong Kong stock exchange.

“The change of the auditor will not have any impact on the annual audit of the Group for the financial year,” China Oceanwide said in the announcement. While the Hong Kong-listed entity’s annual results for 2017 were announced on March 13th, 2018; this year, annual results should be released on March 27th, according to a separate statement to the stock exchange.

Developer Expects 2018 Loss

China Oceanwide’s switch of auditors comes a week after the company released an unaudited assessment of its financial position which indicated that the firm could record a significant net consolidated loss for 2018. At the end of January, the company issued a similar report that said net profit could fall 55 to 69 percent year on year from the HK$70 million figure recorded in 2017.

It has also been less than a month since the developer extended for the eighth time a deadline to acquire US-based insurer Genworth Financial, a $2.7 billion deal now delayed to March 15. The stock price for NYSE-traded Genworth has sunk 11.5 percent since PWC’s resignation from China Oceanwide’s was made public.

Beijing-headquartered Oceanwide Holdings owns close to 75 percent of China Oceanwide.

Profits Drop for Two Straight Years

China Oceanwide’s profit has steadily dropped from the $170 million it achieved in 2016. In 2017, the company’s net profit fell 59 percent to $69 million. Its revenue, in contrast, decreased seven percent between 2016 and 2017 to HK$142 million. In the first half of last year, profits were $13 million on revenue of $70 million — a profit margin 25 percentage points lower than that of 2017.

The fall in profits was accompanied by higher debt. China Oceanwide, which had leverage of 80 percent at the end of 2017, continued to rack up obligations through the end of 2018.  In December the firm issued HK$600 million worth of notes via the Singapore stock exchange, and between December 2018 and February of this year, it received HK$54 million in short-term loans from its subsidiary China Tonghai Finance.

An Oceanwide Trail of Trouble

PWC’s resignation is the culmination of a two-month-long string of setbacks that has pitted China Oceanwide Holdings Group’s US subsidiary, China Oceanwide USA Holdings Co Ltd, against the FBI and prompted the group to put some of its most valuable assets on the market.

During February 2019, the company reportedly put a site New York Financial District property on the market for under $300 million — a 23 percent discount from the $390 million it paid to acquire the property in March of 2016.

Four days after the reports surfaced of Oceanwide putting its New York prize
on the market, a contractor which had helped build its Oceanwide Plaza project in LA filed a lien in Los Angeles County Superior Court attempting to collect at least $52 million for work done on the complex on Figueroa street.

In a statement in January, Oceanwide USA had said that construction of the Los Angeles property was halted in in order for it to be “recapitalized,” after the company had sank $1 billion into the project, with the company saying at the time that progress would resume in mid-February. Construction, however, remains stalled, according to a report published on Saturday by the Los Angeles Times.

A few days before the Oceanwide Plaza halt was announced on January 24, the company sold two projects in Shanghai and Beijing to Tianjin-headquartered Sunac for RMB 12.55 billion ($1.85 billion).

Auditor is Out, FBI is In

While discussions on the possible reasons behind Oceanwide Plaza’s abrupt stop have focused on China’s overseas capital controls and the company’s own financial troubles, the decision to hit the brakes may also be linked to an ongoing FBI probe that surfaced that same month,

An affidavit filed by the FBI names Oceanwide as a subject of interest in an investigation into potential bribery, kickbacks, extortion, and money laundering in connection with property deals in Los Angeles.