Shares of China's top dairy farm crash nearly 90% by mid-day, wiping out US$4b in market value

Cows stand in stalls as they are milked on a 40-hectare farm.
Cows stand in stalls as they are milked on a 40-hectare farm.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Shares of China Huishan Dairy Holdings Co sank by a record 85 per cent in Hong Kong before the company halted trading.

The sudden crash wiped out about US$4.1 billion (S$5.74 billion) in market value in the stock, which was the worst performer on the MSCI China Index. A record 779 million shares in the company changed hands, the most on Hong Kong's exchange.

The mysterious tumble will increase concerns about the risks that can befall investors in Hong Kong, after the 47 per cent plunge by Hanergy Thin Film Power Group in 2015.

The move is also a vindication for Carson Block, whose Muddy Waters Capital said in December it was shorting the stock in the conviction the company was "worth close to zero." Huishan said at the time allegations in the report were groundless and contain misrepresentations.

Calls to Huishan Dairy's investors relation department were not answered. Lorraine Chan, a spokeswoman for Hong Kong Exchanges & Clearing, said the bourse operator doesn't comment on individual companies. Ernest Kong, a spokesman at the Securities and Futures Commission, declined to comment on the matter.

Muddy Waters alleged in December that Huishan had been overstating its spending on its cow farms by as much as 1.6 billion yuan (S$325 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 cow farms to an undisclosed related party and Muddy Waters concluded that Chairman Yang Kai controls the subsidiary and farms.

Speaking to Bloomberg News on Friday (March 24), Block said he was surprised by today's tumble.

"It's definitely not what I expected to happen," Block said by phone from San Francisco. "I haven't ever been involved with a stock that holds this steady pattern for a few months after our initial report, and then just crashes with no advance warning - that's the first time for me."

Before Friday's plunge, Huishan had been one of the most stable stocks in Hong Kong. It fluctuated in a narrow range between HK$2.69 and HK$3.23 from the start of October 2015 through yesterday, never swinging more than 5.1 per cent on a closing basis in a single trading day during that period. In July and August of 2015, the stock surged 60 per cent amid a spate of open-market purchases by CEO and controlling shareholder Yang.

About 73 per cent of Huishan's shares are held by Champ Harvest Ltd, a company that's controlled by Yang.

About HK$453 million worth of stock changed hands today in 13,260 trades with an average size of about 59,000 shares. That compares with a total of HK$850 million in the previous 30 days - total - via 16,418 trades with an average size of 18,000 shares.

Short interest in the stock accounted for 3.7 per cent of outstanding shares on Wednesday, down from 5.4 per cent in December, according to data compiled by IHS Markit and Bloomberg.

Among Block's previous targets was Hong Kong-listed Chinese timber company Superb Summit International Group Ltd. In 2015, the SFC ordered the Hong Kong stock exchange to suspend all dealings in Superb Summit's shares, which hadn't traded since November 2014. Hanergy shares have been suspended since their plunge in May 2015, while Li Hejun quit as chairman.