Carson Block takes on China's top dairy farm in latest short

Trading in shares of China Huishan Dairy Holdings Co was triple the three-month average on Monday, when it resumed trading after being suspended on Friday. Prominent short seller Carson Block targeted the Hong Kong-listed dairy farm operator and said he would seek out more companies in the city.

Muddy Waters Capital LLC, founded by Block, said it had shorted Shenyang-based Huishan and alleged in a report last week that it's "worth close to zero" and questioned its profitability, causing the stock to drop on Friday before it was suspended.

Huishan, China's largest operator of milk farms with a market value of HK$37 billion ($4.8 billion), said the allegations in the report are groundless and contain misrepresentations, according to a statement late Friday.

Huishan is the latest company in Hong Kong to be targeted by short sellers, who borrow shares and sell them in the hope of profiting by acquiring them at a lower price later. Block said in a telephone interview he's concerned prices of stocks traded in the city can be manipulated because of the low 25 percent free-float requirement, which also makes it a challenging market to sell short.

"I'm always a fan of shorting total frauds and Hong Kong has its share, so it will always be a place for us," said Block, who was speaking generally about listed companies in the city. "The trading volumes generally aren't that good and I think there are a lot of stock manipulations in Hong Kong. That's a function of the volumes being poor."

Block previously targeted Hong Kong-listed Chinese mainland timber company Superb Summit International Group Ltd Last December. The Securities and Futures Commission ordered the Hong Kong Stock Exchange to suspend all dealings in Superb Summit's shares, which had stopped trading since November 2014.

The Muddy Waters report on the company contained misleading statements and fabricated content, according to a Superb Summit statement to the exchange in January 2015.

Block said he is hoping his report on Huishan will encourage active fund managers to sell the stock.

Huishan responded, in a statement rebutting various points in the report, that Muddy Waters has made allegations "which are groundless and contains various misrepresentations, malicious and false allegations and obvious factual errors." Muddy Waters alleges Huishan recorded "fraudulent profits" tied to the company's reports of production of alfalfa, which Muddy Waters said it purchases in large quantities from third parties.

Bloomberg