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announcement.
CHINA HUISHAN DAIRY HOLDINGS COMPANY LIMITED
中 國輝山 乳業控 股有限公 司
(Incorporated in the Cayman Islands with limited liability)
(Stock Code: 06863)
CLARIFICATION ANNOUNCEMENT
IN RELATION TO MUDDY WATERS REPORT
RESUMPTION OF TRADING
The board of directors (the ‘‘Board’’) of China Huishan Dairy Holdings Company Limited (the
‘‘Company’’, together with its subsidiaries, the ‘‘Group’’) has noted the significant increase in trading
volume of the shares of the Company in the morning trading session on 16 December 2016, prior to the
Company’s application to suspend trading in its shares on The Stock Exchange of Hong Kong Limited
(the ‘‘Stock Exchange’’). The Board has also noticed a report released on 16 December 2016 by
Muddy Waters Capital LLC on the Company (the ‘‘Muddy Waters Report’’).
The Muddy Waters Report has made allegations which are groundless and contains various
misrepresentations, malicious and false allegations and obvious factual errors of the Group which the
Company wishes to clarify as set out below.
Muddy Waters Report commentary: ‘‘Since at least 2014, the company has reported fraudulent profits
largely based on the lie that it is substantially self-sufficient in producing alfalfa.’’
For the years ended 31 March 2014 (‘‘FY2013–14’’), 31 March 2015 (‘‘FY2014–15’’) and 31 March
2016 (‘‘FY2015–16’’), the Group produced approximately 140,000 tonnes, 134,000 tonnes and 85,000
tonnes of alfalfa respectively whereas in FY2015–16, the Group also produced approximately 79,000
tonnes of oats as feed (which can be used in place of alfalfa). In each of the last three financial years,
the Group purchases approximately 10,000 tonnes of alfalfa from external suppliers, mainly to
supplement feed supplies prior to the annual harvest from the Group’s plantations which commences
around June each year. Accordingly, external purchases accounted for approximately 4.3% to 9.2% of
the Group’s supply of alfalfa/oats feed requirements contrary to what Muddy Waters Report’s
allegations that ‘‘... Huishan’s shipments from Anderson started in 2013 with approximately 70,000 mt
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that year, dropped to 30,000–40,000 mt/yr in 2014 and 2015 when the China milk market softened, and
that volume improved modestly in 2016’’. As a matter of fact, the Group never purchased alfalfa from
Anderson & Grain Company directly during the last three financial years.
Muddy Waters Report commentary: ‘‘We believe Huishan has engaged in CapEx fraud related to its
cow farms. We estimate that Huishan has overstated the spending on these farms by RMB893 million to
RMB1.6 billion.’’
Since the listing of the Company on the Stock Exchange, the Company has increased its farms in use
by 31 and has also 22 farms under construction. The average capital expenditure for each farm (which
includes not only construction costs but also costs of machinery and equipment) is approximately
RMB60 million. Typically, constructions costs are paid in phases. Increased prepayments are
attributable to both increased percentage of total constructions paid in advance in order to ensure
prompt delivery of the project to meet the strategic plans of the Group. It appears that Muddy Waters
Report mistakenly used total cash outflow divided by number of farms completed during the year to
come up with unit construction cost of a farm. Such calculation basis simply ignored payments of
previous retention money and prepayments for new cow farms.
Muddy Waters Report commentary: ‘‘Chairman Yang appears to have stolen at least RMB150 million
of assets from Huishan — the actual number is quite possibly higher. The theft relates to the
unannounced transfer of a subsidiary that owned at least four cow farms to an undisclosed related
party. It is clear to us that Chairman Yang controls the subsidiary and farms.’’
The Group had once considered expanding its operations to include the rearing of beef cattle and
established as its wholly-owned subsidiary, Huishan Investment Fuyu Shenyang Farming Company
(‘‘Fuyu’’) in April 2014, which then proceeded with the construction of four beef cattle farms. As of
December 2014, construction of such farms had not yet been completed and in view of the tough
market sentiment of the dairy industry, the management of the Group decided to postpone the beef
cattle expansion plan and sold Fuyu that owned the four beef cattle farms to an independent third party
for cash consideration of approximately RMB29.8 million based on the net asset value of that
subsidiary, supported by an independent valuation of the same. The transaction did not constitute a
notifiable transaction of the Company under the Rules Governing the Listing of Securities on the Stock
Exchange (the ‘‘Listing Rules’’). Subsequently, Chairman Yang sought the approval of the Board in
2015 confirming the Group will not engage in the beef industry and that the Board did not object
before Mr. Yang invested in the beef business. In August 2015, Mr. Yang acquired Muhejia to conduct
his personal investment in beef industry and entered into a leasing agreement with the then Fuyu for
hosting beef cattle.
Muddy Waters Report commentary: ‘‘Even if Huishan’s financials were not fraudulent, the company
appears to be on the verge of default due to its excessive leverage.’’
Despite the increase in short term debts during the interim period, its debt ratio as at that date has
reduced to approximately 41% compared to the position as at the last financial year end. Debt ratio was
calculated by net debt (aggregated bank loans and other borrowings net of cash and cash equivalents,
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term deposits, bank deposits and restricted cash and amounts receivable from banks for wealth
management products purchased) over the equity attributable to shareholders of the Company. It is
commonplace for companies to manage its liquidity using its key assets, and given that the major assets
of the Group are biological assets, the sale and lease back of the same, whilst less conventional, should
be more properly considered in that light. As with all responsible companies, the Company continues
actively to manage its financial resources and its debt mix.
Muddy Waters Report commentary: ‘‘CCASS data strongly suggests that a significant portion of
Huishan’s outstanding shares has been pledged as collateral for loans. If we are correct, this presents
a significant risk to long holders if the borrower(s) is/are unable to meet margin calls.’’
It is not unusual for shareholders of listed issuers to pledge shares to secure financing. The Board has
noted that disclosure of interests filings made by the Chairman of the Company under Part XV of the
Securities and Futures Ordinance from time to time, since the listing of the Company. Upon enquiry,
the Chairman of the Company has confirmed to the Board that he does not have any unfilled margin
calls nor is he aware of any impending margin calls that may be made against him or his controlled
companies.
Having made such enquiry with respect to the Company as is reasonable in the circumstances, we
confirm that we are not aware of any other reasons for these price or volume movements or of any
other information which must be announced to avoid a false market in the Company’s securities or of
any inside information that needs to be disclosed under Part XIVA of the Securities and Futures
Ordinance.
The Board would like to emphasise that:
.
The annual financial statements have been audited by external independent auditors since the
listing of the Company’s share in September 2013 (the ‘‘Listing’’) on the Main Board of The Stock
Exchange of Hong Kong Limited. Since the Listing, the Group’s accounts have never been
qualified by the external independent auditors; and
.
Muddy Waters Report states that the author ‘‘is short’’ the securities of the Company. Accordingly,
the Company believes that the author might profit from a drop in the price of the Company’s
securities. The Company reserves its rights to take legal action (including commencing litigation)
in connection with the Muddy Waters Report.
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Trading in the shares of the Company on the Stock Exchange has been halted with effect from 11:12
a.m. on 16 December 2016 pending the release of this announcement. Application has been made for
the resumption of trading in the shares of the Company on the Stock Exchange with effect from 9:00
a.m. on 19 December 2016.
By Order of the Board
China Huishan Dairy Holdings Company Limited
Yang Kai
Chairman
Shenyang, 16 December 2016
As at the date of this announcement, the board of directors of the Company comprises Mr. Yang Kai, Ms. Ge Kun, Mr. So
Wing Hoi, Mr. Xu Guangyi and Mr. Kwok Hok Yin as executive Directors; Mr. Li Kar Cheung as non-executive Director;
Mr. Song Kungang, Mr. Gu Ruixia, Mr. Tsui Kei Pang and Mr. Kan Yu Leung Peter as independent non-executive
Directors.
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