Meanwhile In China, Cow-Collateralized Stock Buybacks

Tyler Durden's picture

Over the past few years, we have written many strange stories about China's often-ridiculous, perpetually-bubbly, always on the precipice financial system. The story about China's literal "cash cows", however, is by far the strangest.

As everyone knows by now, the primary reason the global equity market, taking its cues from the US, is where it is now is due to a relentless stream of debt-funded stock buybacks. Earlier this year Bloomberg stumbled on the same thing we have written since 2013, namely that "there is only one buyer keeping the bull market alive."

And, as it turns out, even China figured it out. There is only one problem... well two:

  • The first is that to buyback your own stock, a company needs to generate a substantial amount of cash flow which can then be used to directly buyback your own shares (making management/shareholders who use corporate cash flows to make themselves wealthier in the process). Unfortunately most Chinese companies, many of which are stunning case studies in fraud, have a glaring problem when it comes to actual profitability and generating cash flows.
  • The second problem is that unlike in the US, following the recent (and now largely burst) corporate bond bubble, issuing bonds to fund buybacks - and in general lending to risky companies - appears to now be rather frowned upon in China.

So in the absence of these two necessary conditions, how is a Chinese company to boost its stock price by buying back its stock? The answer, as it turns out is cows, and specifically a cow sale-leaseback transaction.

That's precisely what China Huishan Dairy Holdings, which operates the largest number of dairy farms in the country, has done.

According to Bloomberg, the company is selling about a quarter of its herd, about 50,000 animals, to Guangdong Yuexin Finance Lease Co. for 1 billion yuan ($152 million) and then renting them back. The reason: to obtain urgently needed cash (let some other sucker CEO worry about paying the coupon on the lease), so it can repurchase glorious amounts of its stock.

And yes, cows were used as collateral. "It’s not very common to use cows as collateral," said Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. "The value of a cow would fluctuate depending on milk prices and other factors, so it’s a risky asset for lenders. It would be hard to do forced selling - there’s no liquid market for a large number of cows."

Puns intended.

To be sure, there is a politically correct spin on the situation, and that's what the Bloomberg story focuses on. It writes that "with an estimated $1.3 trillion of risky loans in the country, Chinese banks are becoming more cautious about lending, forcing some companies to look for new ways to borrow." As a result finance leasing has been growing in popularity, especially for purchases of equipment. "In Huishan Dairy’s case, the story is an increasingly common one in China of rising debts, slumping commodity prices and the propensity of Chinese executives to use their shares as collateral for private loans."

And then there is the truth: "Huishan Dairy seems to be selling cows and leasing them back in order to raise money now, because they’ve been using cash to buy back shares," said RHB’s Yuen, who has a “sell” rating on the stock. "The chairman wants to prop up the share price for reasons that are unclear. It could be a way to get better terms for share pledged-based loans, which he’s done before."

Usually the reasons why any chairman would want to prop up their share price by engaging in activities that are ruinous in the long-run are simple, and they are really one: to cash out in the fastest possible way.

Only in this case, something is off - of only for the time being - because as Bloomberg adds, the company Chairman Yang Kai has been building up his stake in the company to almost 74 percent, according to the latest disclosure of interests to the stock exchange. Even uodder,Yang pledged shares he owned to Ping An Bank Co. to finance the buybacks, RHB said in a research note on Jan. 28.

Meanwhile, going back to "problem 1" above, the company spent HK$1.93 billion ($249 million) buying back 820.2 million shares in the six months ended September, equivalent to almost twice its cash from operations for the same period. This explains the drastic need to find outside funding.

In retrospect, there is nothing surprising about the structure: just like Hanergy manipulated its shares by hammering the close and inciting massive short squeezes in the process briefly making its CEO the richest man in China, the chairman of Huishan has decided to leverage - literally - his equity exposure to the company, and boost the stock prices in the process, before eventally unloading everything on unsuspecting buyers.

It appears that moments hasn't arrived yet, however judging by the stock price it will, and very soon. The share buybacks helped Huishan Dairy’s share price jump 72% since the beginning of July, even as Hong Kong’s benchmark Hang Seng Index fell 22%.


The fraud becomes even more obvious when observing how the rest of the balance sheet has been transforming over the past year: keeping the stock price buoyant drained cash as milk prices were slumping and the company’s debts were rising. Huishan had 10.4 billion yuan of bank loans at the end of September, with more than half needing to be repaid within a year. The value of short-term bank loans had more than doubled compared to six months earlier.

Here's a guess: the debt won't be repaid and Huishan will join the rapidly rising list of bankrupt Chinese companies, but not before the Chairman manages to either sell his company to the public or to the company's own buyback program.

To be sure, for a while the company's stock price was rising on its own. However, recently whole milk powder prices plunged, with the latest GlobalDairyTrade auction price of $2,252 a metric ton on May 17 down 57 percent from a peak in April 2013.

So the company turned some of its cows into cash, leasing them back through a unit at an annualized interest rate of as much as 6.2 percent, with an option to repurchase the cattle at the end of the five years.

Of course, Huishan was delighted to provide whatever terms the naive lenders wanted, if it meant the buyback circle jerk could continue. One was a "culling covenant" - as dairy cows are typically slaughtered after about five years, when their production declines, the agreement included provisions to cull and replace animals regularly.

"Huishan Dairy’s gearing was more than 60 percent last year, so it’s not a bad idea for the company to get a loan for working capital," said Anson Chan, an analyst at Daiwa Capital Markets, who also recommends investors “sell” the shares. "The interest rate for the finance lease is lower than the company’s current bank loans."

Which makes us wonder who the (shadow) bank is that issue the sale-leaseback loans. They may be a prime shorting candidate.

Sale-leasebacks, once unheard of locally, have become a generic way for "asset-rich" Chinese companies to fund themselves.

The growth of finance leasing in China is partly a reflection of the broadening of the nation’s banking system. Most contracts involve the leaseback of equipment, said Shujin Chen, a banking analyst at DBS Vickers Hong Kong Ltd. They totaled about 4 trillion yuan at the end of last year, with the percentage of equipment purchased by finance leasing at about 7 percent to 8 percent, compared to only 1 percent in 2008, she said. “Finance leases offer tax advantages, asset flexibility and cash flow certainty,” Chen said in an e-mail. In China they account for around 4 percent to 5 percent of bank loans, compared with about 22 percent in 2013 in the U.S., where as Bloomberg sarcastically adds, "cow leasing has fallen out of favor."

Even more odd, this is not the first bovine-collaterlized obligation done in China: the first registered cow lease plan was last July, when CreditEase Leasing took ownership of 200 cattle from Hebei Luan County Junying Pastures, a supplier to Inner Mongolia Yili Industrial Group. Huishan Dairy’s lease-back is 250 times the size. The company’s 190,911 dairy cows, valued at 5.73 billion yuan in September, are spread across 78 farms in Liaoning, a province in northeastern China between Inner Mongolia and North Korea.

Still, others are scratching their heads when confronted with the striking details of the cow sale-leaseback transaction.

"The environment just isn’t right for the practice with low interest rates, balance sheets generally in good shape, plenty of heifers and milk prices are low," said Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin, who said it was more common in the 1990s. "Why would anyone want to lease what they could own?"

Especially cows.

"It might take a while for this to turn into a trend," Daiwa’s Chan said. "It won’t be easy at first for banks and other financial institutions to accept this kind of arrangement, because of the risk of holding animals as collateral."

But this is China, where increasingly more insane financial transactions have now become a routine event. And who knows, maybe if Huishan Chairman Yang Kai refuses to sell his overinflated stock, this scheme will catch on. But that begs the question: what's the point to propping up the stock price in an unviable company, and not to sell to the greatest fool? Especially since if there is one thing Chinese capital markets have a lot of, it's the latter.

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HedgeAccordingly's picture

Damn. Sign me up. Lots of fat cows in Illinois. China is loose

OrangeJews's picture
OrangeJews (not verified) HedgeAccordingly May 26, 2016 6:24 PM

Where's the beef?

Gold Pedant's picture

More like Atom Heart Moo-goo-gai-pan

ufos8mycow's picture

This is udderly ridiculous.

PT's picture

They took it literally.  Ecownomics:


You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new President of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

Full text:

Manthong's picture

They could aggregate the underlying and sell them as collateralized securities…

I suggest they call them “SBS”’s  (Stockyard Backed Securities).

Arnold's picture

300days of milk production

5 year productive lifespan before becoming hamburger.

Mad Cow Free herds?


Scratching head.

northern vigor's picture

I visited an old cattle dealer one day...he was dressed up better than normal, and I asked him why? He just came from the bank. This banker hired him often to go out to farms and appraise herds thy held mortgages on. 

Ross said he went out to this farm and the only thing in the barn was a very skinny looking tom cat.

Ross went to the bank and gave the listing of livestock..."One cat"

The banker asked him what they should do? Ross said "they better get out there quickly because that cat doesn't look like it's been fed for two weeks and they may loose it too."

old naughty's picture

Bankers care not.

"Stir fry" (speculate) beef noodles is very popular, no?

Does $3,040 (20,000 yuan) per cow sound reasonable collateral value to you?

northern vigor's picture

sounds a little high priced. good purebred Holsteins sell for $2500 canadian here.

On a side note, looking at those butt ugly Holsteins in the picture...Here in Canada they remove the ovaries from slaughter cows and do invitro embryo work creating Holstein embryos to export to China. China doesn't care if they are top genetics or not, as long as they are cheap with four legs. 

N0TaREALmerican's picture
N0TaREALmerican (not verified) HedgeAccordingly May 26, 2016 6:46 PM

Re:  Lots of fat cows in Illinois

No,  they meant real cows. 

CHoward's picture

Hey - give credit where credit is due.

nibiru's picture

and give the cow where the milk is due.

hoos bin pharteen's picture

Why buy the cow when you can rehypothecate the milk?

buzzsaw99's picture

i pity the cows.

Kissy Ass's picture

I don't like beef products in China. Steak just taste weird. Like the cow was eating chemicals for it's lifespan.

Taste weird.

Yen Cross's picture


  We've been doing that with Homo sapiens in the U.S. for decades.

  Look at all the employee leaseback companies.

   That's effectively, companies transferring a large portion of labor expenses to a third party, for a percentage of the overall [labor] capital expenditures, in order to free up cash for the scum that floats on top of the turd pile.

  * P.S. > When is the 3x River Pig offering hitting the underwriters?

Hail Spode's picture

Stock market collapses when the re-hypothicated cow backing $8,000,000,000 in "equity" dies.

N0TaREALmerican's picture
N0TaREALmerican (not verified) Hail Spode May 26, 2016 6:55 PM

Holy COW!

Charles Offdensen's picture

Bullshit collaterized with bullshit. Why didn't we think of this before?

For the record it's starting to smell like bullshit!!!

buzzsaw99's picture

in this case cow shit. the difference being that cows don't brag about it.

N0TaREALmerican's picture
N0TaREALmerican (not verified) May 26, 2016 6:34 PM



"And, in earlier days, a company that drastically diluted its shares (with large amounts of convertible debt or multiple offerings of common stock) was said to have 'watered' its stock. This term is believed to have originated with the legendary market manipulator Daniel Drew (1797-1879), who began as a livestock trader. He would drive his cattle south toward Manhattan, force-feeding them salt along the way. When they got to the Harlem River, they would guzzle huge volumes of water to slake their thirst. Drew would then bring them to market, where the water they had just drunk would increase their weight. That enabled him to get a much higher price, since cattle on the hoof is sold by the pound. Drew later watered the stock of Erie Railroad by massively issuing new shares without warning."

Reginald Blome's picture

Not many know that story. Bravo.

nibiru's picture

I see they are first testing animals - later it may be SDRs. Smart. Chinese always play chess not checkers. But I wouldn't go for cows - rather horses.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) May 26, 2016 6:54 PM

Meanwhile in America we have that cow Hillary running for Prez.  Funny times we live in

Reichstag Fire Dept.'s picture

Cowlaterallization derivatives! Manuere!

Reichstag Fire Dept.'s picture

Cowlaterallization derivatives! Manuere!

DrZipp's picture

Wow these guys know how to milk the system.

northern vigor's picture

Reminds me of that old plum...

A farmer has one cow, the socialist government takes half the milk and gives it to his neighbour.

A farmer has a cow. The Nazis shoot him and takes the cow.

A farmer has one cow...The communists takes the cow to the state farm and pays the farmer to milk it. His wife stands in line for 6 hours every day to get a cup of milk.


A  capitalist farmer has two cows...sells one, buys a bull and grows a herd, does an IPO and retires in Palm Springs.

A Red Chinese capitalist farmer belonging to the Communist Party has 200,000 cows. He sells 50,000...rents them back uses the money to  buy a house in Vancouver.


Possible Impact's picture

You have two cows

  Two Cows

HONG KONG CAPITALISM: You have two cows.

You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with associated general offer so that you get all four cows back, with a tax deduction for keeping five cows. The milk rights of six cows are transferred via a Panamanian intermediary to a Cayman Islands company secretly owned by the majority shareholder, who sells the rights to all seven cows' milk back to the listed company. The annual report says that the company owns eight cows, with an option on one more. Meanwhile, you kill the two cows because the Feng Shui is bad.

Yen Cross's picture

     Lemme guess??? The [Flatulence Group LLC] underwrote this deal?

Spungo's picture

China is definitely the wild west of finance these days. Secure a loan using other loans? Sure, why not.

Bunga Bunga's picture

20,000 Yuan per cow, holy cow! Buy a cow and retire rich. Cows never go down. Buy a cow before you are priced out forever. What can go wong?

PT's picture

Hey!  At least at the end of the day, you still have a cow.  Milk has value.  Beef has value.  Leather has value.  err, I won't ask what you paid for the cow.  Still a lot better than many other "investments".

... err, and, of course, that is assuming that you don't have a rehypothecated cow.  First in, first served.  Better get outta Dodge real quick.  If you don't hold that cow in your own two hands ...

not a yahoo's picture

OMG somebody please stop this narrative: "Chinese banks are becoming more cautious about lending".  Is anyone sure that their banking credit system's only purpose isn't just to funnel money to any business that is promising to hire workers? They must have a lot of goodwill on their books..

At least our banking system's moral hazard bubble blowing activities can be reversed with a nice big depression, whereas in the above system I don't see anything but confetti.

Flankspeed60's picture

Slick manure-vering and and slimy ecownometrics just to make moo-lah.

kaboomnomic's picture

I'll take cowlaterals ANYTIME, ANYWHERE.

At least i have REAL COLLATERALS. Rather than a piece of papers.

I know most of you living on the cities. You really don't know the real value of animals in a farm..

SmittyinLA's picture

A good dairy cow is worth a predictable amount of money over time

Wahooo's picture

Why lease hen you can on? Pretty simple. Protection from falling milk prices against bank loan payments, protection from yuan devaluation hich reduces asset values, easier more prdictable cash flow just to name a few. Sell leasebacks are used a lot in the US and around the world in agriculture. The only odd thing about this one is spending the money on stock buybacks, but without as much need to hoard cash for capital improvements, that's not so weird either.