Huishan dairy denies fraudulent financial disclosure

Leading dairy firm China Huishan denied fraud charges published by Muddy Water LLC, a due diligence based investment firm that conducts investigative research on public companies. Huishan says that its operations are proper and that its financial report disclosure is true and accurate.

The Hong Kong-listed dairy company ranks No 1 in Northeast China and No 5 in the national market, with the 3.09 billion yuan ($444 million) worth of liquid milk sales in fiscal year 2016, according to public information.

The mainland plant, which carried out a $1.3 billion listing in Hong Kong in 2013, was suspended when down 2.14 percent on Friday morning, following the report from the US-based short seller.

"Since at least 2014, the company has reported fraudulent profits largely based on the lie that it is substantially self-sufficient in producing alfalfa. We found overwhelming evidence that Huishan has long purchased substantial quantities of alfalfa from third parties, which gives us no doubt that Huishan's financials are fraudulent," according to Muddy Water's report.

Huishan did not reply directly to the charge, but a publication on Huishan's website says it has planted 3,780 hectares of alfalfa along Liaohe River and Linghe River. "This can basically meet the demand of the company. And the company plans to expand the alfalfa planting as its business expands."

Chen Jiao, chief agriculture analyst of Industrial Securities, said the dairy industry suffered excess problems in the past two years, but is now on the verge of recovery. "Unless there is a serious problem with the company itself, no one would go against the trend."

Modern Farming, one of the most shorted dairy stocks in Hong Kong, rose over 60 percent during the past three months, which may force short sellers to return borrowed shares at a higher price, according to Chen.