Huishan Dairy: How Can RMB2.4 Billion Just Disappear?

Call in the forensic accountant. China’s Hong Kong-listed Huishan Dairy reports that bank confirmations indicate that the company has only RMB467 million (US$72.5 million) in cash and cash equivalents – when the management accounts say it should have RMB2.9 billion (US$450 million).

It’s the latest problem for the mainland’s largest integrated dairy operation, whose shares have been suspended for trading in Hong Kong since March 24. That was when the stock price imploded after word got around that Huishan had failed to repay some of its bank loans and was in talks with its lenders.

Huishan subsequently reported that Ge Kun, who oversaw treasury operations, had disappeared after sending a letter saying she was taking time off and did not wish to be contacted. CFO So Wing Hoi later resigned, citing health issues, joining a boardroom exodus that has left just company founder and chairman Yang Kai comprising the board of directors.

Following Ge Kun’s disappearance and resignation of the CFO and others in finance, “the Group has encountered tremendous difficulties in preparing its management accounts, in particular, the Group’s financial information with respect to its cash, receivables, payables and borrowings,” Yang Kai told the Hong Kong stock exchange in an announcement dated June 5.

The RMB467 million confirmed by the banks are restricted deposits, meaning that the banks concerned had imposed restrictions on their movement. Huishan faces a number of lawsuits from creditors and other parties.

Yang Kai also reported that Huishan’s total indebtedness is around RMB26.7 billion, far larger than the RMB16 billion it reported as of September 30, 2016. In addition, the company believes it has guaranteed approximately RMB3.9 billion in loans by third-party entities.

“The Group will take appropriate steps to engage a forensic accountant to investigate the Group’s deficiency in its financial statements,” Yang Kai promised. The banks loans and other borrowings are secured over property, plant and equipment, but given the shambles of the financial statements, it is unclear whether those assets exist or are unencumbered.

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