Apr 04, 2017 06:15 PM

Financial Problems Haunted Huishan Dairy Before Disaster Struck

(Beijing) — Production has remained normal at Huishan’s dairy plant in the northeast city of Shenyang, the capital of Liaoning province. But at the company’s headquarters, in the city center, the atmosphere has become tense. Over the past week, groups of people, including creditors, investors, suppliers, and reporters, have flocked to the building, guarded by police and with yellow tape cordoning off the front gate.

China Huishan Dairy Holding Co. has been at the center of controversy since March 24, when the company’s share price unexpectedly plunged 85% in early trading, the largest one-day percentage drop ever recorded on the Hong Kong Stock Exchange. The company has halted trading since, but still has seen HK$32 billion ($4.1 billion) of its market capitalization evaporate.

The dramatic fall came a day after Huishan executives held a closed-door meeting with provincial officials over the company’s debt problems.

Huishan has been in default on some of its loans since late March. Bankers told Caixin that Huishan currently owes about 12 billion yuan ($1.74 billion) to 13 billion yuan to as many as 70 financial institutions, including 23 banks. The Bank of China, which granted a 3.3 billion yuan credit line to Huishan, is the company’s largest creditor, followed by Jilin Jiutai Rural Commercial Bank.

But Huishan’s debt exposure may be even greater, as the company has raised funds from private investors through peer-to-peer (P2P) lending, asset management plans, and other channels. According to an estimate by Wang Bairong, chief risk officer of the Industrial and Commercial Bank of China (ICBC), Huishan’s total liability may have reached 40 billion yuan. (ICBC offered a 2 billion yuan credit line to Huishan.)

Restructured from a state-owned dairy factory two decades ago, Huishan has long been a household name in Liaoning and one of the country’s largest dairy producers. The company launched an initial public offering (IPO) in Hong Kong in September 2013, raising HK$7 billion.

Local officials have eagerly sought to rescue Huishan, fearing the incident could hurt financial stability and investor confidence in the already stagnant local economy. The Liaoning government promised to buy a plot of land from Huishan for more than 90 million yuan using money from its own coffers. Officials also urged major banks to “make an exception” for Huishan by not calling in loans, downgrading the firm’s credit worthiness, or taking it to court to have its assets frozen, all in an effort to assist in the company’s restructuring.

Government officials also pressured Huishan Chairman Yang Kai to sell equity for cash. Yang, who holds a 72% stake, said he will seek to raise 15 billion yuan to solve the liquidity crisis by selling company equity to new strategic investors.

“But who wants to buy Huishan shares now?” a manager from a bank said.

In the heart of China’s rust belt, Liaoning has an economy that has suffered from the decline of industry, putting pressure on local banks’ assets. Data from Liaoning’s banking regulator showed that by the end of 2016, banks in the province had 114.5 billion yuan in nonperforming loans, with a bad-loan ratio of 2.96%, up 0.15 percentage points from the beginning of the year.

Broken Chain

At the March 23 meeting with creditors, Yang said his company had a “broken capital chain.”

Yang’s acknowledgment came two days after Huishan sent notice to its creditor banks saying it would be unable to make 300 million yuan in interest payments on time by the end of March.

The reason the company gave for failing to meet its obligations was odd. It said the firm’s vice president, Ge Kun, suffered an acute attack of an unspecified illness, resulting in the firm’s inability to transfer funds necessary to make the payments.

In a later statement, the company said it was unable to get in touch with Ge, who went on leave as “recent work stress had taken a toll on her health,” and “did not want to be contacted.” Ge, who joined Huishan in 1996, had long been in charge of the company’s capital operations and fundraising.

According to Huishan’s financial report, by the end of September, the company had total assets of 34 billion yuan with 21 billion yuan in liabilities. But the company has suffered from a liquidity crunch, as it held over 11 billion yuan in bank loans due within one year.

Several bankers told Caixin that lending to Huishan had always made them nervous because the company often waited until the very end of a grace period to repay loans, barely avoiding default. “It seemed that Huishan somehow always managed to find funding at the last minute,” one banker said.

In June, a credit rating company warned that Huishan had been late with payments since January 2016.

But Huishan’s debt crisis may extend beyond banks. The company has channeled funds from financial leasing firms, P2P lending sites, and other institutions that may expose individual investors to risks.

A securities brokerage source told Caixin that Huishan has obtained loans from over 10 financial leasing firms, including JIC Leasing Co., Digital China Group, and CATIC International Leasing Co.

Huishan was also granted 50 million yuan in loans from Hongling Capital, a P2P lending website, in early February, according to Hongling Chairman Zhou Shiping.

Trading records from Dalian Financial Assets Exchange Co. showed that 175 wealth management plans had been offered to private and institutional investors to raise funds for Huishan. It is unclear how many investors may be affected by the current crisis.

Capital Maze

Huishan has 40 billion yuan in debt exposure, and there are many questions where the money was spent. “If Huishan only runs its current (dairy) business, it is impossible to owe so much money,” said Lei Yongjun, chairman of Proper Tao Ltd., a dairy-industry consulting firm.

The considerable gap between Huishan’s borrowing and spending records has fueled concerns. In December, California-based short-selling firm Muddy Waters warned investors of Huishan’s high leverage ratios and accusing it of fraud and funds misappropriation. Huishan denied the allegations.

According to Huishan’s 2016 financial report, the company has invested 19 billion yuan in subsidiaries engaging in dairy production and sales, cow breeding, feed production, and renewable energy projects.

Local media reports indicate that over the past few years, Huishan has invested 10 billion yuan building dairy farms and production facilities in Shenyang, Jinzhou, Fuxin, and other cities in Liaoning.

These investments contributed 50,000 cows, 23 dairy farms and one production plant to Huishan since 2014, according to data from the company’s official website.

According to Proper Tao’s Lei, Yang has sought to expand Huishan’s business scope, to grab market share beyond Liaoning from rivals like Heilongjiang Wondersun Dairy Co. and Mengniu Dairy Co.

Yang has pushed Huishan to extent its business to cover a broader section of the industry chain, including grass planting, cow breeding, dairy production, and meat processing. Business registration documents showed that Yang is stakeholder in a number of companies in Shenyang, Beijing, and Shanghai, involving a wide range of businesses. Yang also controls several property firms that develop residential properties in Shenyang.

In 2015, Huishan tapped into the renewable energy sector, in hopes of generating revenue from cow manure produced on its farms. Su Yonghai, the company’s chief financial officer, said in November 2015 that Huishan planned to spend hundreds of millions of yuan in renewable energy projects in 2016 and expected the new investments to become the company’s major profit source.

That year, Huishan established Liaoning Huishan Lingkong New Energy Technology Co. to develop clean-energy-powered dairy farms. Huishan Lingkong’s registration document shows that its registered capital rose to 240 million yuan as of March 16 from an original 100 million yuan.

But the new business endeavors have contributed little to Huishan’s financials. According to the company’s financial report, during the six months between March and September 2016, Huishan reported 2.5 billion yuan in revenue from its core business of cow breeding, and dairy and milk-powder production, compared to 234,000 yuan generated by other businesses.

Huishan has also spent heavily in the stock market since 2014 to support its share price. Market records showed that since December 2014, when Huishan’s share price in Hong Kong halved from its IPO price of HK$2.52, Yang has increased his holding from 49.7% to over 72% through 51 purchases.

Market analysts said these purchases have cost over HK$5 billion but have helped Huishan stabilizes its share price — until the sharp plunge on March 24.

It was only a matter of time before the firm’s high leverage and accounting manipulation caught up to it, said Carson Block, founder of Muddy Waters, in a recent interview with Caixin.

An earlier version of the story misstated the amount of Huishan's debt exposure.

Contact reporter Han Wei (

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