Muddy Waters to target more Hong Kong-listed firms after Huishan

Mr Carson Block, founder and director of Muddy Waters LLC.
Mr Carson Block, founder and director of Muddy Waters LLC. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - Mr Carson Block said he would seek out more Hong Kong-listed companies to target, after the prominent short seller took aim at China Huishan Dairy Holdings with a report alleging the US$4.9 billion (S$7.07 billion) dairy farm operator was "worth close to zero".

Mr Block, founder of Muddy Waters Capital, said in an interview that he is concerned prices of stocks traded in the city can be manipulated because of the low 25 per cent free-float requirement. That also makes Hong Kong a challenging market to sell short, Mr Block said by telephone from San Francisco. Separately, Huishan said the Muddy Waters allegations are groundless and contain misrepresentations.

"I'm always a fan of shorting total frauds and Hong Kong has its share so it will always be a place for us," Mr Block said, commenting generally about listed companies in the city. "The trading volumes generally aren't that good and I think there are a lot of stock manipulations in Hong Kong and that's a function of the volumes being poor."

Huishan, China's largest operator of milk farms, is the latest company to be targeted by short sellers, who borrow shares and sell them in the hope of profiting by acquiring them at a lower price later. Mr Block said he is hoping to level the playing field, and Muddy Waters renewed its assault on Shenyang-based Huishan on Monday (Dec 19) with a follow-up report that questioned the company's reported revenue.

Huishan shares, which were suspended on Friday after dipping on the Muddy Waters report, rose as much as 2.9 per cent as they resumed trading on Monday. Shares that changed hands were more than seven times the three-month daily average. The benchmark Hang Seng Index fell 0.8 per cent.

The company denied Muddy Waters' latest allegation in an update on Monday that the dairy operator's reported revenue is also fraudulent. Huishan said the group's consolidated revenue, prepared to international financial reporting standards, "fairly represents" its performance, according to a stock exchange statement on Monday.

On Friday, Chairman and Chief Executive Officer Yang Kai lifted his controlling stake in the milk producer by buying shares through a company called Champ Harvest, raising it to about 73 per cent. That was the same day Muddy Waters said it shorted the stock.

Huishan's stock "seems to be rising because it's in friendly hands due to the low free-float and the chairman owning the majority of the shares", said Mr Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. "Most of the major allegations have been rebuffed by the company, so that can allay some fears."