Milking the system

Happier days for Yang Kai

Huishan is one of China’s oldest dairy brands. Set up as an industrial project in cooperation with the Soviet Union, the year of its establishment – 1951 – is incorporated into its logo. Its mission today is to build China’s most trusted dairy brand. But trust is something that has been conspiciously absent since the Hong Kong-listed firm’s shares dropped 85% last Friday. When markets opened that morning Huishan was valued at HK$38 billion ($4.8 billion) but by noon its worth had plunged to HK$5.7 billion.

The sell-off began when news reached Hong Kong that regulators in Liaoning province had held a meeting with 23 banks to discuss Huishan’s debts.

Speculation spread that an audit from Bank of China had uncovered a large number of forged invoices issued by its executives, including its chairman and controlling shareholder Yang Kai. The rumour was that Yang had also misappropriated at least Rmb3 billion ($435 million) of company funds to invest in real estate. Huishan responded in a stock exchange circular that the allegations were untrue. However, it did admit that it has been unable to contact its executive director Ge Kun, who manages Huishan’s treasury function and its relationships with the group’s principal banks.

“Ge indicated that the recent work stress had taken a toll on her health. She has taken a leave of absence and does not want to be contacted at this time,” the statement explained.

Huishan also confessed that it has been late in making some payments and that “a large number” of bank loans are subject to annual rollovers.

In another sign of a cash crunch, Yang has already pledged most of his shares in Huishan as collateral.

According to its interim report, Huishan had run up more than Rmb15 billion in bank loans by last September, with Rmb10.8 billion of them maturing within a year. Caixin Weekly reports that Bank of China’s Liaoning branch is the biggest creditor, with a Rmb3.3 billion credit line to the dairy. Jilin Jiutai Rural Commercial Bank (partly-owned by Yang himself) has exposure to another Rmb1.8 billion of debt.

Huishan made headlines last year when it sold 50,000 cows to a leasing firm for Rmb1 billion and then rented them back. This month’s meltdown also follows allegations by short seller Muddy Waters last December that it had been overstating its revenues and making unannounced transfers of assets.

The crisis is some distance from the brighter days of Huishan’s $1.3 billion listing as China’s largest “grass-to-glass” dairy producer in 2013. Perhaps things might have been different had it been sold to New Hope Group when the state-owned milk firm was looking to expand. But instead of selling to an iconic private-sector player, Shenyang’s government opted for a venture backed by Yang and American investors in 2002. He was then awarded a 50% stake (though at the time the privatisation of a storied brand to a partly foreign-controlled entity stoked protests by workers).

Now that Huishan is in hot water, it has gone back to the local authorities for help. It is being reported that Liaoning’s government will inject emergency cash by paying Rmb90 million for company land. The local government is also reported to be pressing the banks not to downgrade the company’s credit rating or file lawsuits.

Liaoning is a warning indicator of how companies may struggle to meet debt payments as interest rates rise – four of the eight bonds that have defaulted in China this year were issued by companies from the province, according to Bloomberg.

Back in Hong Kong, minority shareholders won’t be too hopeful of a rapid resolution to the case. Meanwhile more than 30 companies on the stock market there have had their shares suspended for at least a year, Bloomberg reports, including Hanergy, whose stock collapse two years ago (see WiC283) looks rather similar to Huishan’s.

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