Dec 20, 2016 05:58 PM

Huishan Dairy Bounces Back from Short-Seller Attack

(Beijing) — Shares of Hong Kong-listed Huishan Dairy rebounded this week after an attack by short seller Muddy Waters, as investors dismissed the kind of fraud allegations often leveled against Chinese firms in similar assaults.

U.S.- and Hong Kong-listed Chinese stocks have become a favorite of short sellers like Muddy Waters due to a lack of transparency created by the companies' cross-border status. A wave of attacks crested five years ago, prompting a confidence crisis that led to a major eviction of many smaller companies from New York by the U.S. securities regulator.

Huishan shares initially fell as much as 4.5% last week after Muddy Waters published a note on Thursday saying the company used fraud to inflate its profit margins. But the share price quickly bounced back after Huishan issued a denial.

After the early rebound, Muddy Waters issued a second 13-page research report over the weekend that alleged that Huishan's reported revenue was also fraudulent and vastly overstated. Huishan followed up with another denial, individually addressing most of Muddy Waters' main points.

Huishan shares rose on Monday to finish near their preattack level, as the stock changed hands at levels not seen since May. They closed on Tuesday at the same price before the attack.

While Huishan survived the attack with minimal damage, the kinds of issues underpinning previous, more-successful assaults on Chinese firms still exist, said David Webb, a Hong Kong-based shareholder activist and founder of corporate governance watchdog He said such issues have led to a "governance discount" on overseas-listed Chinese stocks.

"The frequency of problems is what drives the corporate governance discount on stocks in Hong Kong and other offshore markets," he said. "Investors will buy shares, but they will discount the price they're willing to pay for potential problems."

Contact reporter Yang Ge (

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