Flavor-Maker’s Dividend Plan Leaves Bourse With Bad Taste in Its Mouth

Investors might like a flavor manufacturer’s unusually generous dividend plan, but for the Shenzhen Stock Exchange, it tastes a bit off.

Huabao Flavours & Fragrances Co. Ltd. stock leapt for the second straight day to 45.61 yuan ($6.80) per share on Thursday, climbing 9.46% after a 10% surge the previous day. By comparison, the ChiNext index— Shenzhen’s Nasdaq-like startup board where Huabao is listed — fell 2.58% on Thursday.

On Tuesday, the company announced that it would pay its stockholders 40 yuan per 10 shares, amounting to 2.46 billion yuan in total.

The dividend plan, however, quickly got the attention of the Shenzhen Stock Exchange, which sent a letter (link in Chinese) to Huabao that questioned the unusual plan, especially considering that the company had only been listed for a year.

As of the end of December, Huabao had a total of 2.5 billion yuan of profit attributable to shareholders of the parent company, according to the dividend plan. Based on this figure, the company plans to distribute 97.91% of all such dividends, the exchange said in the letter, adding that the company had until March 20 to report back about the specific reasons for the high proportion of dividends. The exchange specifically questioned whether Huabao will pay the dividends with channeled money raised from its initial public offering (IPO).

The dividend plan will be a windfall for the company’s sole controlling shareholder, Huafeng International Investment, which owns 81.1% of its shares. If Huabao distributes all 2.46 billion yuan to shareholders as planned, Huafeng stands to gain around 2 billion yuan.

As of the end of last year, Huabao had used 732 million yuan — out of the 2.3 billion yuan it raised with its IPO — to supplement cash flow and pour capital into the projects it had pledged to invest in, according to its annual report. However, the company had made little progress in the three guaranteed investment projects, completing only 7%, 2% and 0.1% of the investments, respectively. The stock exchange also asked Huabao to report the reasons for such slow progress.

If the company initially raised funds to expand its production business, most of the money has yet to get there, at least according to the company’s annual report, said Zhou Jianbing, an analyst of Sinolink Securities.

Huabao Flavours and Fragrances mainly develops and produces tobacco flavors, food flavors and food ingredients. In 2018, it reported that its operating income fell 1.3% to 2.2 billion yuan and its profit climbed 2.4% to 1.4 billion yuan.

Contact reporter Timmy Shen (hongmingshen@caixin.com)