Shares of China’s largest dairy farm operator, Hong-Kong listed China Huishan Dairy Holdings Co (中國輝山乳業), were suspended yesterday after short seller Carson Block’s Muddy Waters Capital LLC said the company is “worth close to zero” and questioned its profitability in a report.
Huishan shares slid as much as 4.3 percent to HK$2.69, the lowest level in 15 months, before being suspended in Hong Kong, which the Shenyang-based company said was pending a clarification announcement on the report.
Huishan’s market value post-suspension is HK$37.1 billion (US$4.8 billion).
Muddy Waters alleged that Huishan had been overstating its spending on its dairy farms by as much as 1.6 billion yuan (US$230 million) to “support the company’s income statement.”
The report also alleged that the company made an unannounced transfer of a subsidiary that owned at least four dairy farms to an undisclosed related party and Muddy Waters concluded that chairman Yang Kai (楊凱) controls the subsidiary and farms.
Those findings came from several months of research including visits to 35 farms and five production facilities, drone flyovers of Huishan sites and interviews with alfalfa suppliers, the report said.
Muddy Waters said it has shorted Huishan’s stock.
“It will be even harder for Huishan to get funded in the capital market after the report, amid a couple of earlier allegations that have raised some red flags to investors,” RHB OSK Securities Hong Kong Ltd (興業金融證券) analyst Robin Yuen (袁肇鋒) said.
Huishan’s shares and operations are unlikely to “collapse” due to its high share concentration and sufficient cash flow generated by its dairy business, he said by telephone.
A two-year slump in whole milk prices, which bottomed out in August last year, has put pressure on the dairy industry from New Zealand to China.
On Thursday, China’s second-largest dairy company China Mengniu Dairy Co (中國蒙牛乳業) issued a profit warning, saying that it expected to record a substantial loss for this year due in part to selling excessive raw milk powder supply at market price, thus suffering a loss.
About 73 percent of Huishan’s shares are held by Champ Harvest Ltd, a company that’s in turn 90 percent owned by Yang.
Bearish bets on Huishan have been creeping up since May, with short interest in the company amounting to about 20 percent of the company’s tradable shares.
Huishan shares have been falling in the second half of this year, sliding 13 percent, while shares in its competitor, China Modern Dairy Holdings Ltd (中國現代牧業), have surged over the period amid rising confidence in the industry and amid speculation milk prices would recover.
To raise capital, Huishan has entered into agreements allowing it to sell assets including property, equipment and 40,000 cows to leasing companies, and then rent them back.
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