China Huishan Dairy

Today at 11am, Huishan’s share price started plunging. In one hour, it dropped 85%, wiping out about $4.1 billion in market value. It’s trading halt after that.

China Huishan Dairy - Share Price - 2017-03-24.PNG

Source: Google Finance

IPO

Huishan is engaged in the production and sales of raw milk, liquid milk products and milk powder products. It brought back some memory because I did attend the IPO lunch in Singapore. The management gave a long presentation about the company, and the analyst had to interrupt him to stop so that there would be some time for investors to ask questions. If she didn’t interrupt, I guess the management could go on forever, leaving no time for any questions at all.

When it’s about to get listed in 2013, all things were good. Raw milk price was high and continued rising, Huishan produced record output, intent to increase the capacity significantly and distribute to Tier-2 and Tier-3 cities, and had low production cost. So, we have perfect combination: rising price and rising volume and lower than average production cost.

If you wonder what capacity that I’m talking about, it’s cows! They will increase the number of cows to produce more raw milk. They raised the Cows in New Zealand. They also produced alfalfa, which is the type of grass that cows eat. By producing their own Alfalfa to feed their own cows, they managed their costs lower than their peers.

Financials

Shortly after IPO, raw milk price fell, and so did Huishan’s share price. As capacity expanded, revenue line continued to climb, but the margin fell. Operating margin fell from 40% in FY13 to 15% in FY16, hence earning dropped substantially.

China Huishan Dairy - Financials 10Y - 2017-03-24China Huishan Dairy - Profitability 10Y - 2017-03-24

Source: Morningstar.com

My fund manager did not invest in Huishan, so we did not pay much attention to its story. I don’t own any shares of Huishan either. So, no impact to me.

Muddy Waters Shorting Huishan

In mid December 2016, Muddy Waters released a report which stated that it was shorting Huishan. What really surprised me was that Huishan’s share price hardly drop! When I saw the news, I was expecting Huishan’s share price to fall by at least 20%. A few days after that report, Huishan’s share price rose back to pre-attack level and even higher. It’s like nothing has happened. Investors did not give a damn to the report. I did not know what’s going on but I knew from that time that Huishan is a stock that I should not trade for now. If I had owned it at that time, I should exit immediately as the price didn’t drop.

Today’s 85% plunge is still a surprise to me. If we are to link it to Muddy Water’s report, the lagged effect is just too long and too sudden. Even Muddy Waters was surprised by such plunge. Therefore, just wait for news to come.

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