Muddy Waters shorts dairy firm

BEIJING • Shares of China's largest dairy farm operator, Hong Kong- listed China Huishan Dairy Holdings, were suspended yesterday after short seller Carson Block's Muddy Waters Capital said the company is "worth close to zero" and questioned its profitability in a report.

Huishan shares slid as much as 4.3 per cent to HK$2.69 yesterday, the lowest 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 (S$6.9 billion.

Muddy Waters alleged that Huishan had been overstating its spending on its cow farms by as much as 1.6 billion yuan 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 cow farms to an undisclosed related party and Muddy Waters concluded that chairman Yang Kai 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, according to the report. Muddy Waters said it has shorted Huishan's stock.

Mr Robin Yuen of RHB OSK Securities Hong Kong said: "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." Still, 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 has put pressure on the dairy industry. Huishan chief financial officer So Wing Hoi said in November last year that annual profits will rise over the next few years as Huishan expands outside its core market in north-eastern China and builds a renewable energy business.

There were four sell recommendations and three buy ratings on the stock then. They have now changed to five sells and no one telling investors to buy, according to ratings tracked by Bloomberg.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 17, 2016, with the headline 'Muddy Waters shorts dairy firm'. Print Edition | Subscribe