©2019 Grant Thornton International Ltd. All rights reserved. Forensic Research Report 2019 Data Analytics on Hong Kong Listed Companies Facing Challenges from Adverse Stakeholders©2019 Grant Thornton International Ltd. All rights reserved. Our research report aims to provide readers with a thorough analysis on recent challenge-facing companies listed on the HKEx. The analysis begins by outlining the significant characteristics of the selected companies, followed by examining the major trigger points, and eventually concluding with the meaningful insights drawn from these cases. Our research target consists of Hong Kong listed companies that faced challenges from short- sellers, auditors, regulators, management and shareholders for the years ended 31 August 2017, 2018 and 2019 respectively. The research is solely based on public information, including but not limited to corporate announcements, newspapers, and short-seller reports. In order to capture a vivid picture of the market trend, we cover a wide range of industries with different location of businesses in our database. Objective and Methodology 2 Please visit the following website for additional analyses and an interactive dashboard: Myriad dimensions have been included in our report in order to provide readers with meaningful insights regarding challenge- facing companies. Barry Tong Head of Forensic Advisory Services, Hong Kong©2019 Grant Thornton International Ltd. All rights reserved. Characteristics of Selected Companies 3 Source: HKEx and GT Analysis Source: HKEx and GT Analysis Total Market Capitalization No. of Companies by IPO Year Location of Headquarters Source: Company Annual Reports and GT Analysis Source: HKEx and GT Analysis Industries Industry Conglomerates Consumer Goods Consumer Services Energy Financials Industrials Information Technology Materials Properties while suspension of companies with market capitalization below HKD 1 billion are mostly triggered by their auditors, primarily due to delay in publication of financial results. In addition, an increasing number of challenges from other sources of trigger point has been observed over the years, from 12% in 2017 to 26% in 2019. Detailed analysis for each of the trigger points are discussed on the following pages. Sources of Trigger Point 4 Source: HKEx, Corporate News, Allegation Reports and GT Analysis Trigger Point by Market Capitalization Trigger Point by Year Source: HKEx, Corporate News, Allegation Reports and GT Analysis Our analysis reveals that larger companies, in general, are more capable of dealing with allegations initiated by short-sellers, and they are able to address the issues promptly. Star Chen Director Forensic Advisory Services, Hong Kong Short-sellers Auditors Others 2017 2018 2019 1 2 3©2019 Grant Thornton International Ltd. All rights reserved. In this section, we analyze the cases triggered by short-sellers allegations. In 2017, all of the companies targeted by short-sellers were suspended; while half of the companies remained suspended for trading. Comparatively, in 2019, 43% of the cases did not suspend for trading upon being attacked by short-sellers, and all of the companies resumed trading after clarification from the companies management. Majority of the companies that successfully resumed trading were resumed within three months from the initial short-sellers report. Half of the companies share price dropped one month after the resumption date (if the company was suspended for trading) or one month after the initial attack (if the company did not suspend trading). Cases Triggered by Short-Seller Allegations 5 Impact on Share Price One Month after the Trigger Point or Trade Resumption Date Status as at 31 August 2019 Suspension Period Source: HKEx and GT Analysis Source: HKEx and GT Analysis Source: HKEx and GT Analysis Trading resumed Suspension of trading Never suspended Trading resumed Suspension of trading Never suspended Trading resumed Suspension of trading Never suspended©2019 Grant Thornton International Ltd. All rights reserved. Auditors are another major trigger source. Some of the issues include insufficient information provided to auditors, auditors require more time to perform audit duties, and delay in preparing management account for the auditors. Queries raised by auditors would certainly lead to trade suspension. In 2019, 91% of the research targets remain suspended from trading after being challenged by their auditors, while only 9% of these companies have successfully resumed trading. Half of the research targets have been suspended for over one year; companies that resumed trading usually fulfill their resumption conditions within one year. One month after trading resumed, share price decreased by 0% - 25% for approximately two-thirds of the companies. Cases Triggered by Auditors 6 Suspension Period Source: HKEx and GT Analysis Status as at 31 August 2019 Source: HKEx and GT Analysis Impact On Share Price One Month After Trade Resumption Date Source: HKEx and GT Analysis Trading resumed Suspension of trading Trading resumed Trading resumed Suspension of trading©2019 Grant Thornton International Ltd. All rights reserved. Other trigger points include suspension directed by regulators and disputes between shareholders or management. Majority of these companies encounter complex challenges including but not limited to in-depth inquiries, by which could take an extended period of time to resolve. As such, approximately two- thirds of the companies have been suspended for over one year. On the other hand, for cases triggered by shareholders or management, majority of companies remained suspended from trading after shareholders and management disputes arose, while the remaining companies have never been suspended from trading. 68% of the research targets have a market capitalization of less than HKD 1 billion. Furthermore, most of them are “penny stocks” with share price below HKD 1 at the trigger point. Other Trigger Points 7 Suspension Period Status as at 31 August 2019 Source: HKEx and GT Analysis Source: HKEx and GT Analysis Source: HKEx and GT Analysis Market Capitalization Source: HKEx and GT Analysis Suspension of trading Never suspended Suspension of trading Never suspended Suspension of trading Never suspended©2019 Grant Thornton International Ltd. All rights reserved. Overall, majority of the companies within our scope of research remained suspended from trading as at 31 August 2019. However, we note an increasing trend for companies that did not suspend trading upon facing challenges from adverse stakeholders. The data also suggests that companies of larger market capitalization are more likely to resume trading. Summary of Trading Status as at 31 August 2019 8 Market Capitalization and Trading Status Source: HKEx and GT Analysis Source: HKEx and GT Analysis Trading Status as at 31 August 2019 Companies do not necessarily have to suspend trading for a prolonged period to thoroughly address all allegations. Robust internal controls environment and support from the auditors are important for speedy resumption of trading. Kenneth Lam Senior Manager Forensic Advisory Services, Hong Kong Trading resumed Suspension of trading Never suspended Trading resumed Suspension of trading Never suspended©2019 Grant Thornton International Ltd. All rights reserved. In order for suspended companies to resume trading, all companies published clarification announcements to defend their stance from any allegations by the adverse stakeholders. In addition, publication of outstanding financial statements remains the second most important factor for trade resumption, followed by addressing auditors concerns, demonstrating an adequate internal control system, issuing forensic review report and addressing the issues arose. Companies of larger market capitalization and longer listing period have higher probabilities to resume trading after facing allegations or queries from different adverse stakeholders. Success Ingredients of Resumption 9 Top Conditions for Resumption of Trading Success Factors Source: HKEx, Corporate Announcement and GT Analysis Market Cap. vs. Period between IPO and Trigger Point Source: HKEx, Corporate Announcement and GT Analysis Trading resumed Suspension of trading Never suspended©2019 Grant Thornton International Ltd. All rights reserved. Publication of outstanding financial statement remains the most prevalent challenge over the years, followed by addressing auditors concerns and issuing forensic review reports and address the issues arisen. Companies are in general required to submit a resumption plan that address the resumption conditions within 18 months for main board companies and within 12 months for GEM board companies. Challenges of Resumption 10 Challenges of Resumption Source: HKEx, Corporate Announcement and GT Analysis Prolonged suspended companies need to work out a feasible resumption plan, and execute effectively together with professionals including financial advisors, lawyers, internal control experts and forensic accountants. Barry Tong Head of Forensic Advisory Services, Hong Kong Source: HKEx, Corporate Announcement and GT Analysis Top Challenges for Resumption of Trading©2019 Grant Thornton International Ltd. All rights reserved. 89% of the research target appointed international auditors and 11% of the research target appointed local auditors in Hong Kong. 6% of the companies switched from international auditors to local auditors over the years, yet, the data suggests an increasing trend for companies to keep their existing auditors after the trigger point. For those companies that changed auditors after the trigger point, only a small proportion decided to change from an international auditors to local auditors or from local auditors to international auditors. Change of Auditors? 11 Source: Corporate announcements and GT analysis Source: Corporate announcements and GT analysis Source: Corporate announcements and GT analysis Auditors as at Trigger Date Existing Auditors as at 31 August 2019 Change of Auditors after Trigger Date? Change of Auditors - Breakdown International auditors to international auditors International auditors to local auditors Local auditors to international auditors Local auditors to local auditors No change of auditors Change of auditors? Yes No International auditors Local auditors International auditors Local auditors©2019 Grant Thornton International Ltd. All rights reserved. Challenges and Solutions 12 Prompt clarification Communicate with auditors Prepare for the next waves Engage forensic accountants to perform independent review Evaluate the auditors concerns internally Communicate with the auditors Set up independent board committee and perform independent review by forensic accountants Set up independent board committee Seek advise from lawyers and financial advisors Engage forensic accounts to perform independent review Short-Sellers Auditors Others Challenges Solutions Publication of outstanding financial statements Clarification on allegations Address auditors' concerns Issue of forensic review reports Demonstrate adequate internal control system Address issues from SFC directed suspension Demonstrate management integrity Clarification on allegations Publication of outstanding financial statements Publication of outstanding financial statements Publication of outstanding financial statements Issue of forensic review reports Address auditors' concerns Address issues from SFC©2019 Grant Thornton International Ltd. All rights reserved. Forensic Advisory Services Team 13 Barry Tong Head of Forensic Advisory Services T +852 3987 1266 M +852 9038 8075 E Barry.Tonghk.gt Hong Kong SAR, China Star Chen Director T +852 3987 1272 E Star.Chenhk.gt Kenneth Lam Senior Manager T +852 3987 1265 E Kenneth.Lamhk.gt Ron Pau Manager T +852 3987 1404 E Ron.Pauhk.gt Carol Mak Manager T +852 3987 1361 E Carol.Makhk.gt Polly Wong Manager T +852 3987 1277 E Polly.KC.Wonghk.gt Wendy Wong Assistant Manager T +852 3987 1274 E Wendy.Wonghk.gtgrantthornton © 2019 Grant Thornton Hong Kong Limited. All rights reserved. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Hong Kong Limited is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. 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