Muddy Waters eyes more HK-listed firms after Huishan

Dairy cows stand in barns at the Lake Breeze Dairy farm in Malone, Wisconsin, U.S

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 Co. with a report alleging the USD4.9 billion dairy farm operator was “worth close to zero.”

Block, founder of Muddy Waters Capital LLC, said in an interview he’s concerned prices of stocks traded in the city can be manipulated because of the low 25 percent free-float requirement. That also makes Hong Kong a challenging market to sell short, 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,” 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. Block said he’s hoping to level the playing field, and Muddy Waters renewed its assault on Shenyang-based Huishan yesterday with a follow-up report that questioned the company’s reported revenue.

Huishan shares, which were suspended Friday after dipping on the Muddy Waters report, rose 1.8 percent to HKD2.80 by the close of trading yesterday the biggest increase in six months. The number of shares that changed hands were eleven times the three-month daily average. The benchmark Hang Seng Index fell 0.9 percent.

The company denied Muddy Waters’ latest allegation in an update 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 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 Ltd., raising it to about 73 percent. That’s 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 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.” 

Muddy Waters has made allegations “which are groundless and contains various misrepresentations, malicious and false allegations and obvious factual errors,” Huishan said in its Friday statement, which rebutted various points in last week’s report.

Muddy Waters alleges Huishan recorded “fraudulent profits” tied to the company’s reports of production of alfalfa, which Muddy Waters said it purchases in large quantities from third parties. External purchases of alfalfa accounted for about 4.3 percent to 9.2 percent of the group’s supply of alfalfa and oats feed, according to Huishan’s statement.

Muddy Waters also alleged in its report that “a substantial amount” of Huishan’s shares are pledged to lenders and said that presents a risk to other shareholders because the borrowers could have their positions liquidated “in a disorderly fashion” if they are unable to meet a margin call by creditors. Bloomberg