Money Matters

How the magic went out of Huishan’s financial wizardry

Whenever a bank’s interest is tied to the share price of its debtor, the options become very limited for all concerned

PUBLISHED : Wednesday, 29 March, 2017, 8:16am
UPDATED : Wednesday, 29 March, 2017, 8:16am

Pop! Another bubble fuelled by greed and leverage, with Chinese characteristics, has burst.

The only difference is the one drowning here is Yang Kai, who until recently was atop the food chain, playing rescuer to those kicking to stay above the water.

Like most of the “victims,” Yang thinks big. Before last Friday’s 85 per cent dive in the price of China Huishan Dairy, Yang was on his way to becoming a financial guru.

He lent money and his name to small companies. He built apartments and offices in China. He bought a stake in Hong Kong Life Insurance.

All of these were built on generous loans offered by mainland banks. The wizardry here is apparently not Huishan’s slumping dairy business, but the company’s listing status and share price performance.

Shedding light on this operation are some Central Clearing And Settlement System (CCASS) records showing how Yang has been pledging his shares for money to support Huishan’s share price.

CCASS doesn’t show who’s put up a stock as collateral. However, when it shows sizable amount of shares moving into its system and then onto brokers’ accounts, it’s highly likely to be a result of margin financing by a controlling shareholder.

CCASS shows 68 per cent of Huishan’s shares have moved into brokers’ accounts between February 2014 and last November. That agrees with the 69 per cent stake pledged by Yang announced by Huishan yesterday.

It would therefore be fair to take CCASS data as Yang’s margin finance records, which can be divided into two tranches.

The first tranche happened within months of Huishan’s listing. About 10 per cent was pledged for about HK$1.3 billion if the normal discount rate of 60 per cent was applied.

What matters is the second tranche that happened after Yang bought a 25 per cent stake in Huishan from the late Cheng Yu-tung, clearing a major selling pressure.

Huishan didn’t answer questions emailed by Money Matters.

Between June and November 2015, Yang raised an estimated HK$2.4 billion with his shares as collateral. That was the time he began to buy Huishan shares from the market.

Thanks to that and Huishan’s own buyback effort, the dairy farm operator’s share price rose from below HK$1.6 to HK$2.9 despite weak fundamentals.

A calculation based on records from the Hong Kong Stock Exchange reveals that he has spent HK$3 billion on the shares.

Why does a businessman pledge almost every share in his main business, risking the loss of control and then put every dime back into supporting the stock’s price?

The case of Hanergy Thin Film may offer some insights.

According to the prospectus of Bank of Jinzhou, the bank lent a total of 17 billion yuan to Hanergy’s controlling shareholder Li Hejun in the name of wealth management products, debt instruments and other obscure titles at the end of 2015.

That accounted for 5.5 per cent of the tiny bank’s asset. It was a major exposure by all standards and the collateral was nothing more than the shares of the listed company, Hanergy.

Those were the days when Hanergy’s share price went in only one direction, giving it a market capitalisation of HK$320 billion, more than the exchange operator. To mainland bankers, the loans were no brainers.

If that’s indeed the case with Yang, it not only explains the fortune he has used in supporting Huishan’s share price, but also various anomalies with the dairy producer.

Firstly, the milk producer has been trading at around HK$2.9 ever since August 2015, even as its profit deteriorated. Before the stock’s catastrophic dive on Friday, Huishan’s market value was HK$390 billion. Deja vu.

Secondly, the milk producer has been able to grow its loan by almost a third to 15.3 billion yuan by September 2016, though its total loans-to-equity ratio already stood at 103 per cent last March.

Thirdly, the loan actually became cheaper. Its average interest rate was around 5.9 per cent in 2014. Between last March and September, it was only 5.6 per cent.

Fourthly, amidst a negative cash flow, Huishan sank HK$845 million into some wealth management products issued by three mainland banks. The ultimate benefactor of the products were not known. The return is between 3.2 and 3.8 per cent, two-thirds of the cost of the money.

Once a bank’s interest is tied to the share price of its debtor, the options become very limited for all concerned.