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How an AWOL Director Spurred Huishan's Stock Rout: QuickTake Q&A

In December, short seller Carson Block, founder of Muddy Waters LLC, said China Huishan Dairy Holdings Co.’s stock was worth “close to zero.” On March 24, it plunged 85 percent to the equivalent of 5 U.S. cents in Hong Kong, wiping $4.1 billion from the milk producer’s market value within 90 minutes. A muddled tale of corporate woe has since emerged involving a missing company treasurer, a leverage-happy chairman and serious doubts about the company’s future.

1. Who went missing?

The executive director who managed Huishan’s treasury and cash operations. The company said on March 28 that its last contact with the director, Ge Kun, was a March 21 letter to Chairman Yang Kai explaining that work stress -- heightened by Block’s critical report -- had taken a toll on her health and that she didn’t want to be contacted.

2. So not a good day for the chairman?

It got worse, according to Huishan’s account. That same day, Yang realized Huishan had been late on some bank payments. By March 23, Huishan had arranged an emergency meeting with creditors and government officials in Liaoning province, where the company is based. Huishan said its major lenders, including Bank of China Ltd., expressed confidence at the meeting. But that was before the stock collapsed.

3. Can Huishan survive?

Since it has more than 11,600 employees and 11 billion yuan ($1.6 billion) of debt due within a year as of September 2016, Liaoning’s government and banks have strong incentives to help it avoid a collapse. Either way, minority shareholders could be stuck in their positions for the foreseeable future after the shares were halted. At least 38 Hong Kong-listed companies have been suspended for more than a year, including Hanergy Thin Film Power Group Ltd., the solar firm that lost $19 billion of market value in 24 minutes in May 2015.

4. What about that leverage?

Champ Harvest Ltd., an entity controlled by Yang, owns almost 71 percent of Huishan, but most of those 9.5 billion shares have been used as collateral for loans. Champ Harvest also is the biggest holder of the Hong Kong-listed shares of Jilin Jiutai Rural Commercial Bank Corp., a major lender to Huishan. Jiutai Bank’s shares also tumbled.

5. How did Block score this short-selling victory?

He built his reputation on uncovering financial improprieties at Chinese companies, including the now-bankrupt Sino-Forest Corp. But even he was surprised at how the Huishan stock collapse unfolded. Huishan’s “excessive leverage” had put it at risk of default, he wrote in December, basing his thesis on allegations including that Huishan had misrepresented its self-sufficiency in cow feed, overstated its revenue and made an unannounced transfer of assets to an entity controlled by Yang. Huishan said then that the allegations were groundless and contained misrepresentations.

6. What does Huishan say now?

It categorically denies approving the issue of any forged invoices and "doesn’t believe" there has been any misappropriation, according to its March 28 statement. And Yang, who is also chief executive officer, has denied misappropriating 3 billion yuan to invest in real estate, Huishan said.

7. Does this signal any wider concerns?

Huishan is just one of many Chinese companies finding it more difficult to keep up with debt payments as interest rates rise. China’s corporate debt climbed to 156 percent of gross domestic product at the end of 2016, the highest level since Bloomberg Intelligence began tracking the figures in 2004. Onshore bond defaults were higher in the first quarter than in the same period of 2016.

The Reference Shelf

— With assistance by Lisa Pham, Dominic Lau, Kana Nishizawa, Rachel Chang, and Richard Frost

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