“Muddy waters makes it easy to catch fish.”
Yang Kai started his life as a farm worker. He was talented and was able to use his business acumen in buying a government dairy- Shenyang Dairy. He increased revenue and profits of dairy and called it Huishan Dairy. The company is into growing alfalfa grass, owning cows, packing of milk and milk products and delivering them to supermarkets. Yang called his company – grass to glass company.
Yang was ably supported by CFO So Wing Hoi and treasury head Ge Kun.
Carson Block is a short-seller and the founder of Muddy Waters Research. It specializes in exposing fraudulent accounting practices of publicly traded Chinese companies.
Huishan Dairy was on radar of Muddy Waters. Carson declared that stock of Huishan dairy was worthless. He said that the company had overstated its sales, misrepresented its self-sufficiency in alfalfa and made an unannounced transfer of assets to an entity controlled by Yang.
“When others were using underhanded means to snatch market share and capital, I created the most perfect supply chain…I’ve fulfilled my dreams, but Huishan has its own dreams: of 1 million cows, 100 year-old stores and a 100 year-old brand.”
Yang dismissed allegations and said that Huishan was financially sound company.
Since Chinese economy is very opaque and media too lacks transparency, it was difficult for Muddy Waters to do more research.
“Since at least 2014, the company has reported fraudulent profits largely based on the lie that it is substantially self-sufficient in producing alfalfa…even if Huishan’s financials were not fraudulent, the company appears to be on the verge of default due to its excessive leverage.”
-Muddy Waters Research
But some time later, treasury head Ge Kun just disappeared, followed by resignation of CFO Hoi, who underwent heart surgery. This was followed by news of huge debt accumulated by Huishan Dairy and its inability to pay debt on time. The share price of Huishan Dairy crashed in Hong Kong Stock market. Yang being biggest shareholder of dairy lost billions in just 2 hours. The company now owes $ 5.8 billion to banks and other creditors. Now Yang wants government to bail out dairy as closing down of dairy will mean bad debts for banks.
High leverage and lack of transparency resulted in financial losses to shareholders and bankers.
“If you add derivatives and CO2 to the mix, it can be quite sexy”
-Allen Chan, CEO Sino Forest on monetization of forestry industry
Carson also targeted $5 billion market capitalization company Sino Forest Corporation. It was a tree plantation management company, which planned to sell wood fibre to other organisations.
Muddy Waters Research report suggested that Sino-Forest had been fraudulently inflating its assets and earnings, and that the company’s shares were essentially worthless. Muddy Waters claimed that Sino Forest was a “multibillion-dollar Ponzi scheme”. Sino Forest denied allegations. But soon Sino Forest filed for bankruptcy protection.