China Huishan Dairy shares tumble 90% in one day

Shares in one of China’s largest dairy groups plunged more than 90 per cent on the Hong Kong stock exchange on Friday, knocking $4.1bn from its market capitalisation.

China Huishan Dairy Holdings was granted a trading suspension after its shares saw one of the biggest drops in the exchange’s history, cutting its market capitalisation from $4.85bn to $750m and likely causing paper losses for investors including BlackRock and Vanguard.

Hong Kong’s bourse does not curb the amount shares can fall in a day, unlike other exchanges in London and New York, which automatically suspend stocks from trading if they fluctuate beyond a set limit.

A trigger for Friday’s share price fall appears to have been a report in Chinese news portal Sina Finance, which cited unnamed sources saying that several Chinese banks had investigated Huishan following allegations that a shareholder embezzled Rmb3bn ($440m) for investment in property. The report did not state who the investor was or provide details.

Huishan declined to comment. Chinese web portal Netease cited the company’s chairman Yang Kai as saying the Sina report was untrue.

Huishan suspended trading in December after a report by Muddy Waters, the hedge fund set up by short-seller Carson Block, said the company looked on the verge of collapse owing to excessive leverage. The report also accused Mr Yang of stealing more than Rmb150m in company assets. Huishan at the time issued a fierce denial and suspended trading of its shares.

China Huishan said in a 2015 report that it operated the largest number of dairy farms in China with more than 190,000 cows, and sells a range of milk-derived products including yoghurt and infant formula. The company listed on the Hong Kong bourse in 2013 and has attracted high-profile international investors including BlackRock, which holds a 1.33 per cent stake, and Vanguard, with 0.97 per cent.

Mr Yang bought shares in his own company a number of times last year through Champ Harvest, a vehicle he mostly owns. Mr Yang and a business partner Ge Kun held 73.2 per cent of Huishan’sissued capital, according to a December exchange filing. The pair would have lost about $3bn on Friday.

Huishan also bought back its shares in the past year, prompting some analysts to surmise that the stock was artificially inflated. “We think the share price has been propped up for two years,” said Robin Yuen, an analyst at RHB Investment Bank in Hong Kong.

The company has engaged in a series of financing deals in recent months that have puzzled analysts. Last May the group said it was selling one-quarter of its herd to a financing company based in the southern Chinese province of Guangdong for Rmb1bn ($152m) before renting them back.

“From an operation point of view the sales and operational profits are there, and their product is well loved,” Mr Yuen said. But the company has engaged in what Mr Yuen called “eyebrow raising transactions” and high-interest rate borrowing from small financial institutions, raising concerns about why it apparently could not secure long-term loans from Chinese banks.

The sell-off sent shares down as much as 91.1 per cent on Friday before they recovered slightly to be 85 per cent lower at HK$0.42. Trading was then suspended. The shares closed at HK$2.80 on Thursday.