Muddy Waters Proved Right As Huishan Dairy Prepares For Liquidation

On March 2017, we discussed the sudden 90% drop in the share price of China’s largest dairy farm operator, the Hong Kong-listed China Huishan Dairy Holdings. The collapse occurred the day after its creditors convened an emergency meeting to discuss the company’s cash shortage and was three months after Muddy Waters’ Carson Block questioned its profitability and said the company was “worth close to zero.” After the collapse in the share price we joked that “it suddenly almost is.” Now we have confirmation that Block was correct, as Huishan is entering provisional liquidation, citing liabilities of $1.6 billion. From Bloomberg.

China Huishan Dairy Holdings Co., the Hong Kong-listed company targeted by short sellers including Muddy Waters Capital LLC, is preparing for provisional liquidation in a move that could protect its assets as it negotiates with creditors. The firm had told its Cayman legal advisers to make the preparations, it said in a Hong Kong stock exchange filing Thursday.


Huishan’s board earlier found that the net liabilities of its units in China “could have been” 10.5 billion yuan ($1.58 billion) as of March 31, the company said. A provisional liquidation generally is used to safeguard a company’s assets before a court rules what action to take.

In the Muddy Waters report, Block alleged that Huishan mislead investors by overstating its sales, making an undisclosed transfer of a subsidiary to a company controlled by Chairman Yang Kai and lying about its self-sufficiency in alfalfa. Following its publication, Huishan accused his firm of making allegations which were “groundless, malicious and false”. Apparently not, however. Speaking to Bloomberg, Block, who exited its short position, said.

“The most interesting part is the statement by the directors that net liabilities of the company could be 10.5 billion yuan and I compare that to the last published financials from September 2016 and the company was showing net assets of 12.9 billion yuan," he said. “That’s a clear affirmation that Huishan was a fraud."

In the filing with the Hong Kong Stock Exchange, Huishan stated that it will “take into account, as far as possible, options available to the company to preserve the assets of the group.” Chinese law will apply to the liquidation as Bloomberg explains.

With the majority of its assets held through units in China, any debt restructuring will be subject to Chinese law, Huishan Dairy said.The provisional liquidation could lead to liquidation potentially, or some form of restructuring, according to Keith Pogson, a managing partner at Ernst & Young in Hong Kong. The group’s estimated total indebtedness was about 26.7 billion yuan as of March 31, including about 18.7 billion yuan of bank loans and 4.25 billion yuan of non-bank loans, it said in June. A liquidation would still need approval by shareholders or creditors, according to Shen Meng, Beijing-based director of the boutique investment fund Chanson & Co. Huishan’s move may be aimed at forcing creditors to accept its restructuring plan, which would result in only some repayment of debt, he said.


“Huishan published this stock exchange statement in order to apply pressure on creditors to come to its terms," Shen said. “It is likely that unhappy creditors will now take action, perhaps through legal routes, to protect their interests.”

What’s noteworthy in respect of the Huishan filing is how quickly it followed a statement the company made to the HKSE on 1 November 2017 when it said that it was on track to post positive cash flow from its core operations by the end of March 2018. Furthermore, it said that more than half of its mainland creditors, representing more than two thirds of the debt associated with Huishan and Yang group companies, were backing a debt restructuring plan.

Accounting irregularities aside, Huishan’s performance also suffered, to some extent, from the downturn in the global market for dairy products, as Bloomberg notes.

China’s dairy industry, which imports about a fifth of its milk supply, is recovering from a worldwide raw milk price slump that’s weighed on the profits of producers including China Modern Dairy Holdings Ltd. that’s controlled by China Mengniu Dairy Co. But Huishan’s troubles are largely due to its own capital entanglements and not to wider market trends, said Guangdong Dairy Association Director Wang Dingmian. The company’s milk supply largely goes to manufacturing dairy products under its own brand, according to Wang. Huishan’s existing farms are operating normally, he said.


“It is a very small supplier in the overall market and its troubles will not affect the supply of milk in China,” he said. China’s dairy farming landscape is dominated by smaller-scale farmers, which means that Huishan was one of the bigger industrial farms while still accounting for only a small portion of nationwide milk supply.

So, hat-tip to Carson Block and food for thought from Charles Macgregor, as Bloomberg relays.

Huishan’s troubles should be a cautionary example for investors, said Charles Macgregor, head of emerging markets research at Lucror Analytics.


“There is very likely more Huishans out there, this type of behavior is hardly isolated to a few bad apples.”

This is China…damn right.