PwC's exit with 70 million: The issue with the "first perfume stock" is more than just money

(Written by/Huo Dongyang Edited by/Zhang Guangkai)

	In the Hong Kong stock market, "changing auditors" has never been a trivial action. Especially when a company that has been listed for less than a year parts ways with one of the "Big Four" auditing firms during the annual report window, it is hard to interpret this as an ordinary personnel adjustment; rather, it resembles a forced termination of an audit.

	On March 16, "the first perfume stock," Yingtong Holdings, announced that its original auditor, PwC (known as "PricewaterhouseCoopers" in Hong Kong), had resigned, and another firm, RSM, would take over.

	On March 17, Yingtong Holdings issued a suspension announcement before the market opened, explaining that the temporary suspension was to wait for further announcements regarding the change of auditor. However, as of now, Yingtong Holdings has not provided any further explanation on the matter, and the stock remains suspended.

	The starting point of this split is a prepayment of HKD 70 million.

	Shortly after Yingtong Holdings completed its IPO on the Hong Kong Stock Exchange on June 26 last year, the company entered into several agreements with three service providers to obtain multi-year public relations, data analysis, and social media promotion services, at a cost of up to HKD 70 million.

	From a business logic perspective, this type of expenditure is not uncommon, especially for a perfume distributor that relies on brand operations and channel capabilities; marketing investment is almost part of the growth narrative.

	During the audit process, PwC attempted to conduct a thorough examination of this fund, requiring clarification of the supplier background, internal group review, transaction pricing, service content, and the final flow of funds.

	In the announcement, Yingtong Holdings stated that it had already engaged independent professional consultants to conduct the investigation, but as of the date of the resignation letter, the company had failed to provide sufficient supporting materials, and PwC could not establish a precise timetable for completing additional procedures on these matters, which would incur extra audit fees.

	Ultimately, Yingtong Holdings decided to change auditors.

	RSM, which took over the role from PwC, while not one of the "Big Four," is a member of a globally ranked international accounting network and has played an important role as a "mid-sized auditing firm" in the Hong Kong stock market over the long term. When the "Big Four" choose to exit due to "audit disagreements," "excessive risks," or "uncontrollable costs," RSM often becomes the practical choice to avoid delays in annual reports and prolonged suspensions.

	What is truly worth noting is not the HKD 70 million itself, but its position within the entire company structure.

	For a company that has just completed its IPO, this amount roughly corresponds to a significant proportion of the net fundraising.

	According to Yingtong Holdings' offering results, the total amount raised during the IPO was HKD 960 million, with a net amount of HKD 883 million. The HKD 70 million prepayment accounts for about 8% of its IPO net fundraising.

	For the fiscal year ending March 2025, Yingtong Holdings reported revenue of HKD 2.258 billion and a net profit of HKD 246 million, with the HKD 70 million accounting for nearly 3 percentage points of the year's net profit.

	At the same time, Yingtong Holdings is a family-run enterprise with highly concentrated ownership.

	Before the IPO, Yingtong Holdings was virtually "entirely family-owned." Founder Liu Jurong and his wife Chen Huizhen held a combined 100% stake through a holding platform, with no real external constraints in both legal and economic terms.

	Even after the IPO, this structure has not fundamentally changed. After globally issuing about 333 million shares during the IPO, their combined ownership ratio still stands at 75%.

	Before going public, Yingtong Holdings also distributed substantial dividends prior to filing. According to the prospectus, from fiscal years 2022 to 2024, Yingtong Holdings paid dividends of HKD 128 million, HKD 189 million, and HKD 314 million to Liu Jurong and his wife, totaling HKD 631 million, exceeding the company's net profit of HKD 550 million during the same period.

	In other words, the company had already distributed nearly all its profits before going public, even slightly "overdrawing" future profits, to the controlling shareholders.

	Viewing this structure alongside the audit conflict clarifies the logic.

	On one side is a family-controlled ownership structure with a history of substantial dividends prior to the IPO; on the other side is the emergence of a HKD 70 million prepayment shortly after listing, with its purpose centered around "difficult-to-verify" marketing and services.

	When PwC attempted to penetrate these transactions, it was essentially challenging one thing: whether the company's internal use of funds still adhered to the transparency and verifiability standards expected of a listed company. And this is precisely where family enterprises often experience tension.

	More critically, it occurs at an extremely sensitive time: after the IPO and before performance disclosure. The capital markets instinctively become alert to behaviors such as "large expenditures right after fundraising," and once audit disagreements are layered on top, this alert quickly transforms into a crisis of trust.

	PwC's choice to withdraw directly sends a signal: the complexity of the issues has exceeded what conventional audits can bear. For a global auditing firm, the decision to continue servicing boils down to weighing a more fundamental question—whether they are willing to endorse the financial statements of this company.

	The Hong Kong stock market has always reacted directly to such events. Changing auditors in itself is not terrifying; what is terrifying is the context it accompanies: occurring at the annual report node, involving significant amounts, with a resignation from the "Big Four," followed closely by a suspension.

	When these elements combine, the market often does not get caught up in details but quickly provides an overall judgment: this is not a normal replacement but a risk exposure.

	Last December, Hong Ji Fruit, which had its H-share listing status revoked by the Hong Kong Stock Exchange, also exhibited two characteristics before encountering issues: concentrated control and highly "manipulable" profits and cash flow.

	The end result is that funds begin to lose transparency within the "prepayment-supplier-recirculation" structure, audits become ineffective, and the company loses basic trust.

	Yingtong has certainly not reached that point yet. But it already possesses a very similar precondition: a highly concentrated control structure + a historical inertia of highly free fund allocation.

	In this sense, the split between Yingtong and PwC is not just a case but a typical sample.

	It reveals not just the issue of the whereabouts of the HKD 70 million but a more fundamental proposition: when a publicly listed company's finances cannot be independently verified, how much trust remains in the market to support its valuation.

	Although Yingtong Holdings' title as "the first perfume stock" sounds attractive, the capital market has not provided positive feedback; the company's stock price fell below the issue price on its first day of trading and has since weakly operated below the issue price for a long time. As of the suspension, the stock price has declined nearly 30% from the issue price, with a market value of less than HKD 3 billion.

	In the Hong Kong Stock Exchange, many small and medium-sized companies have weak governance foundations, highly relying on external audits for information disclosure, while audit firms actually bear the role of the "first line of risk control." Once the trust relationship between a company and its auditor breaks down, this defense line becomes ineffective, and the basis for investors' judgment suddenly diminishes.

	In the capital market, the worst-case scenario is not declining profits, nor even losses, but rather when no one is willing to sign off on the financial report. When the auditor chooses to exit, the story is already half over.

	The remaining half no longer depends on how the company explains it but on whether the market is still willing to believe.