Melco Resorts Stock Could Gain Support from China Audit Accord

Posted on: August 29, 2022, 02:06h. 

Last updated on: August 29, 2022, 02:47h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Melco Resorts & Entertainment (NASDAQ: MLCO) is among the Chinese stocks trading in the US that could benefit from a new deal struck by US and Chinese regulators.

Melco US listing
Melco’s City of Dreams in Manila. The company may be able to retain its US listing. (Image: Wall Street Journal)

Last Friday, the Public Company Accounting Oversight Board (PCAOB) reached an accord with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China. The deal is regarding audits and investigations of China- and Hong Kong-based companies that trade in the US. Melco is one of those firms.

This agreement marks the first time we have received such detailed and specific commitments from China that they would allow PCAOB inspections and investigations meeting U.S. standards,” said Securities and Exchange Commission (SEC) Chairman Gary Gensler in a statement. “The Chinese and we jointly agreed on the need for a framework. We were not willing to have PCAOB inspectors travel to China and Hong Kong unless there was an agreement on such a framework.”

In March, the PCAOB noted it cannot inspect Melco’s audits because Ernst & Young conducts those examinations in Hong Kong, where the casino operator is based. That scenario was viewed as potentially endangering Melco’s Nasdaq listing.

Melco Could Stave Off Delisting

In April, the SEC added a dozen firms to the list of Chinese companies trading in the US that could be in violation of the Holding Foreign Companies Accountable Act (HFCAA). Under the terms of the HFCAA, audits of foreign companies trading in the US must be scrutinized by the PCAOB.

The overarching theme of Chinese companies profiting from listing shares on US exchanges while not being subject to the same regulatory standards as domestic firms isn’t a Melco-specific issue. Rather, the casino operator is one of many Chinese firms US policymakers and regulators worry are flouting accounting standards.

So while the PCAOB/CRSC agreement is a step in the right direction for Chinese firms, including Melco, in terms of retain US listings, there’s more work to be done.

“Make no mistake, though: The proof will be in the pudding. While important, this framework is merely a step in the process,” added Gensler. “This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.”

What’s Next for Melco

If Melco can’t come into compliance with PCAOB standards, it’d have time to rectify that situation, and it wouldn’t immediately lose its Nasdaq listing.

The casino operator could also move its headquarter to Macau from Hong Kong, because companies based in the gaming center aren’t being targeted by US regulators. Speculation surfaced earlier this month Melco is considering such a move. Still, it’s in the gaming firm’s best interest to retain access to US markets.

“It’s a privilege for foreign issuers to access our markets — the largest, deepest, most liquid markets in the world. Investors in US markets should be protected — and have trust in a company’s financial numbers — regardless of whether an issuer is foreign or domestic. Further, if foreign issuers want access to our public capital markets, they must be on a level playing field with U.S. firms,” concluded Gensler.