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Huabao Suspends Trading After Short-Seller Report

Huabao International Holdings Ltd., a maker of flavors and fragrances used in cigarettes, suspended trading in Hong Kong after the stock plunged on a short-seller report that questioned its finances.

Huabao fell 8.1 percent to HK$3.98 at the close in Hong Kong yesterday after short seller Anonymous Analytics said the company “reports absurdly high margins, which industry sources say should not be possible.”

The company didn’t give a reason for the suspension. In a Hong Kong stock exchange filing late on April 24, Huabao said it wasn’t aware of any reasons for the changes in its share price and trading volume.

“Most of the main points in the report aren’t new and investors have raised suspicion before because it’s obvious the chairwoman has been reducing her holdings,” said Christina Lie, analyst at First Shanghai Securities. Lie, who currently has a “hold” rating, said she will review her rating pending the company’s explanation.

Chinese companies are under increased scrutiny globally by regulators and investors amid allegations against firms including Sino-Forest Corp. and Chaoda Modern Agriculture Holdings Ltd. Anonymous Analytics on its website said Huabao consistently reports profit margins exceeding 70 percent, higher than its peers with a 40 percent to 50 percent range.

Detailed Response

Jason Wong, Huabao’s Hong Kong-based head of investor relations, said the company will release a detailed response to the report and it should be released before the deadline for reporting its full-year results at the end of June, he said.

PricewaterhouseCoopers LLP is listed as Huabao’s auditor in its interim report for the six months ended September. The company’s previous accountant Deloitte Touche Tohmatsu resigned in 2006 because the parties “could not reach a consensus on the audit fees,” Huabao said in a statement then. There was no disagreement, according to the statement.

The company’s American depositary receipts fell 6.2 percent to $25.32 in over-the-counter trading in New York yesterday. Each depositary receipt represents 50 underlying common shares.

Huabao is preparing for its results ended March 31, the company said in its statement yesterday. Production and operations are proceeding normally, it said.

Chinese vegetable supplier Chaoda lost 82 percent of its market value in 2011 and delayed an annual earnings release on Sept. 30 after Anonymous Analytics questioned its finances in a report. Chaoda’s shares have been suspended since Sept. 26, when it was reported that executives are subjects in a market-misconduct case.

‘Queen of Cash Out’

Huabao’s Hong Kong-based chairman Chu Lam Yiu, whose name is also written as Zhu Linyao, was nicknamed “queen of cash-out” by Hurun after it placed her in second place on a list of Chinese entrepreneurs who became rich by cashing out of their companies. Chu has sold 8.5 billion yuan in Huabao shares since 2006, reducing her stake from 70 percent in 2006 to less than 40 percent, Hurun said in a report.

Chu is listed at number 48 on Hurun’s 2011 China’s Rich List with a wealth of $2.7 billion, while Forbes Magazine ranked her at number 601 on its global list of billionaires and at number 18 among billionaires in Hong Kong, with a net worth of $2.1 billion as of March 2012.

Short investors bet against a stock by selling borrowed shares with the expectation of repurchasing them at a lower price. Long investors buy shares betting the price will rise.

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