An unreachable corporate treasurer, an emergency meeting with creditors, a US$4.1 billion stock collapse and a vindicated short seller.
All that and more converged in a remarkable week for China Huishan Dairy Holdings Co (輝山乳業), a milk producer with outsized ambitions that might turn into the country’s latest poster child for weak corporate governance, the dangers of leverage and the potential for financial shocks.
Four days after a sudden 85 percent drop in Huishan shares left investors grasping for answers, the company yesterday laid out its version of events in a Hong Kong exchange filing.
Ge Kun (葛坤), the executive director who managed Huishan’s treasury operations, has been unreachable for a week, the company said.
Huishan’s last contact with her was a letter to chairman Yang Kai (楊凱) on Tuesday last week explaining that work stress — heightened by a critical report from short seller Carson Block in December last year — had taken a toll on Ge’s health and that she did not want to be contacted.
That same day, Yang said he realized the company had been late on some bank payments.
By Thursday, Huishan had arranged an emergency meeting with creditors and government officials in Liaoning Province, where it is based.
Huishan said its major lenders, including Bank of China Ltd (中國銀行), expressed confidence at the meeting.
However, that was before the stock collapsed on Friday, and Huishan could not provide any assurances that their support would continue.
The company said its shares, which were halted after losing most of their value in less than 90 minutes, would stay suspended until the board received an update on the company’s financial position.
“There’s ongoing concerns about corporate governance, but now the real concern is the banks’ asset quality,” CMB International Securities Ltd (招銀國際證券) Hong Kong-based strategist Daniel So (蘇沛豐) said. “The risk management of banks may come under scrutiny.”
Huishan is just one of many Chinese companies finding it more difficult to keep up with debt payments as interest rates rise.
At least eight onshore bonds, four of which were issued by companies in Liaoning, have defaulted so far this year, compared with seven in the first quarter of last year, data compiled by Bloomberg showed.
China’s corporate debt climbed to 156 percent of GDP at the end of last year, the highest level since Bloomberg Intelligence began tracking the figures in 2004.
Bank of China said it could not comment when contacted by Bloomberg News on Monday, while calls to the Liaoning government’s financial services office were not answered.
At Huishan’s office in a tower near Hong Kong’s main business district, a Bloomberg reporter yesterday rang the doorbell several times without getting an answer.
A telephone inside the office could be heard ringing after calls to the company’s investor relations line, but nobody picked up.
It has been a dramatic turn of events for a company that promoted itself as China’s most vertically integrated dairy firm — producing everything from cow feed to raw milk to high-end dairy products — and commanded nearly US$5 billion in market value as recently as last week.
The company had appeared to shake off allegations from Block’s Muddy Waters LLC in December, with the shares trading in an unusually narrow range until the rout on Friday.
Questions remain about how Huishan got itself into this position and whether it can survive the storm. However, with more than 11,600 employees and 11 billion yuan (US$1.6 billion) of debt due within a year as of September last year, Liaoning’s government and Huishan’s banks have big incentives to avoid a collapse.
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