Hong Kong Stock Exchange

China Huishan Dairy shares plunge as much as 91 per cent

Dairy company plunges in Hong Kong trade on Friday, one day after it held closed-door talks with 23 major local lenders

PUBLISHED : Friday, 24 March, 2017, 3:26pm
UPDATED : Friday, 24 March, 2017, 10:46pm

China Huishan Dairy Holdings, the country’s largest cattle farm operator, plunged as much as 91 per cent in Hong Kong during a dramatic sell-off on Friday, less than four months after short-seller Muddy Waters said the company was “worth close to zero” and a day after it was called into a meeting with local lenders.

The collapse in the share price, from HK$2.80 to HK$0.42 before a trading suspension at midday, means more than US$4.1 billion was wiped off its market value after 779,390 shares in the company changed hands within just four hours. That was the highest trading volume for any stock on the Hong Kong bourse on Friday.

On Thursday, representatives of Huishan were called into a meeting with 23 of its major local creditor banks, including ICBC, Bank of China, Bank of Communications and China Development Bank, according to a copy of a notice issued by the finance administration office of Liaoning province seen by the Post.

Officials from the Shenyang municipal government, the finance administration office, and the provincial banking regulator also attended the meeting.

“Huishan has been constantly raising capital via sale-leasebacks on its assets over the last year with little-known financial leasing companies, which suggests the company is quite desperate for cash,” said Robin Yuen, a consumer analyst with RHB Securities.

“The company says it is simply ‘rolling-over’ higher rate loans from before with the new lower rate loans, which is not entirely convincing.”

In December, Muddy Waters, a prominent short-selling fund, published a report saying Huishan had inflated the expenditure on its dairy farms by as much as 1.6 billion yuan (US$232.27 million). Huishan, based in the northeastern city of Shenyang, fired back, calling the Muddy Waters report “groundless”.

China Huishan Dairy chairman Yang Kai, who became a billionaire in 2013 following the Hong Kong listing of Huishan, increased his stake after the company was targeted by short-sellers.

Yang on Friday dismissed market speculation that he had embezzled 3 billion yuan in company funds to invest in properties in Shenyang, a city struggling with economic woes, according to mainland news portal Netease.

“All of them are rumours,” he said in a phone interview with Netease, adding that he “was absolutely not prepared to see the shares crash”.

Several efforts by the Post to reach Yang by phone and email on Friday were unsuccessful.

Multiple attempts by the Post to contact the cellular phone of Ge Kun, executive director and a major shareholder of Huishan, went directly to voice mail.

The company has 1.38 billion yuan of debt maturing in October 2018, according to Bloomberg data.

“The company has admitted the chairman has property projects in Shenyang before and it is quite obvious real estate has been doing poorly for the last few years due to the sluggish economy there,” Yuen said. “I would not be surprised if the chairman continues to borrow money.”

Ba Shusong, chief China economist at Hong Kong Exchanges and Clearing, said on the sidelines of the Boao Forum that mainland investors needed to be aware that Hong Kong’s market regulations are different from those in the mainland in many ways.

“There are usually some clues that investors can trace before sudden stock price movements,” Ba said.

Zhang Luo, head of investor relations for Huishan, was not immediately available for comment.

The stock plunge could also bring paper losses to Ping An Bank, a unit of Ping An Insurance, which issued a HK$2.1 billion loan to the dairy farm operator in late 2016 collateralised by 25 per cent of Huishan’s outstanding shares.

In the Muddy Waters report, the researcher also concluded that the company had made an unannounced transfer of a subsidiary that owned at least four cow farms to an undisclosed related party. Muddy Waters found that company chairman Yang controlled the subsidiary and farms.

Huishan Dairy halts trading as shares fall to 15-month low on Muddy Waters’ short-selling list

The cash-strapped dairy farm operator is no stranger to unorthodox financial plans. In April, it proposed to raise 1 billion yuan by selling 50,000 cows – about a quarter of its herd – to Guangdong Yuexin Finance Lease Co, and then leasing the animals back.

The plan failed, but it didn’t discourage Huishan from proposing a revised scheme in November, in which it aimed to raise 750 million yuan by using 40,000 cattle as collateral for a loan.

Active short-sellers such as Muddy Waters have made their name betting against Chinese companies listed in Hong Kong and North America.

Sino-Forest Corp, the former Toronto-listed operator of tree plantations, is probably the most famous victim of Muddy Waters’ shorts. The company’s US$6 billion in market value was decimated after its accounting was questioned in 2011. Muddy Waters made allegations about the company’s business practices and said it was a “ponzi scheme”.

Less than a year after Muddy Waters’ first report, Sino-Forest filed for bankruptcy protection in Canada.

With additional reporting by Eric Ng.