RISK MANAGEMENT

Muddy Waters Goes After Hong Kong: Is Your Company the Next Target?

Spare a thought for So Wing Hoi. The 46-year-old CFO of Hong Kong-listed China Huishan Dairy Holdings probably thought that the company had survived the assault by short-seller Muddy Waters in December. Huishan’s share price remained remarkably stable in the months since then, despite the US research group’s accusation that the Shenyang-based company has been reporting “fraudulent profits” since 2014.

But last week, on March 24, Huishan’s stock price plunged an astonishing 85%, ending at HK$0.42 per share when trading was halted after the morning session. The share price had hovered around the HK$2.80-range even after Muddy Waters’ December 15 broadside.

If you are the CFO of a mainland company listed in Hong Kong, you might need to be looking over your shoulder. Muddy Waters’ past targets include Chinese companies Sino-Forest, Orient Paper, Superb Summit International, Focus Media and NQ Mobile

What happened? “The company will issue an announcement as soon as practicable after it has completed enquiries,” Huishan Chairman Yang Kai told the Hong Kong stock exchange. On March 28, the company said in a filing that it had "noted rumors in the market, including one that Bank of China had undertaken an audit of the company and discovered a large number of forged invoices issued by members of the group and the controlling shareholder of the company, Mr. Yang Kai."

Huishan said the media reports are "untrue," adding that it had confirmed with Bank of China that no audit has been conducted "which discovered any forged invoices or misappropriation of funds." But it confirmed that Ge Kun, who is principally responsible for Huishan's sales and branding, human resources and government affairs, had taken a leave of absence. She also oversees and manages treasury and cash operations and relationships with principal bankers.  

On March 21, said the company, Yang Kai had learned that Huishan "had been late in some bank payments" and reached out to the Liaoning provincial government for help. The local government arranged a meeting with 23 creditor banks on March 23, where the lenders indicated continued confidence in the group, said Huishan.

However, Huishan admitted that "there is no assurance that such banks' views would remain unchanged." Trading in the shares will remain suspended "until such time as the board has been able to ascertain an updated postion of the company's financial position."

Are You Next?

An emboldened Carson Block, the man behind Muddy Waters, now says he will be issuing a report against another Hong Kong company soon. “We have been doing a lot of work on Hong Kong-listed companies, and there might be a big call in the coming weeks,” he told the South China Morning Post. 

Who’s the target? If you are the CFO of a mainland company listed in Hong Kong, you might need to be looking over your shoulder. Muddy Waters’ past targets include Chinese companies Sino-Forest, Orient Paper, Superb Summit International, Focus Media and NQ Mobile. But the short-seller had also taken on well-known non-Chinese companies, among them Singapore-listed enterprise Olam International, a leading commodities trader.

Few are safe, in other words. Perhaps Muddy Waters is shying away from the blue chips and long-established companies, given that there are many other easier targets. But Block has proved he can take on even giants like Olam if he feels he can construct a case for it. 

Red Flags

CFOs, of course, would already have a sense of whether their company is vulnerable, given their access to all the financials. But what if you are considering a job offer from an organization that may be a potential target, or looking to embark on a commercial relationship with such an organization as supplier or customer?

Some years back, credit-ratings agency Moody’s identified 20 ‘red flags’ that it believes “highlight issues meriting scrutiny to identify possible governance or accounting risks for non-financial corporate issuers in emerging markets.” The report had reportedly angered many companies and Moody’s never issued a follow-up.

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