China Modern Dairy Holdings Ltd has surged 81 percent since its July low, making it the third-best performer on an almost 500-member Hong Kong gauge. During that timeframe, short interest in the stock almost doubled to its highest level in 14 months, according to data compiled by IHS Markit Ltd and Bloomberg.
The steepness of the rally by the Maanshan, China-based company is surprising some analysts. There are twice as many sell ratings as buys on the company, which reported a loss in the first half of the year amid slowing Chinese demand for dairy products and rising competition. Investor confidence toward the industry has improved amid speculation milk prices will recover, according to Mizuho Securities Asia Ltd, while the stock surge may be forcing short sellers to return their borrowed shares at a higher price.
«Recent share moves of China Modern Dairy have been quite strong, so it may be making short sellers suffer losses,» said Sam Chi Yung, senior strategist at South China Financial Holdings Ltd in Hong Kong. «It’s still relatively cheaper than other players. This may support the shares to go up further.»
While China Modern has rebounded, the stock is still down 60 percent from its November 2013 peak. The stock trades at 13 times earnings, compared with 36 times for China Huishan Dairy Holdings Co and China Mengniu Dairy Co’s multiple of 21.
«The people who are buying it are buying it on the thesis that raw milk prices on the Chinese mainland have bottomed and are looking for the company to start going up in the coming quarters,» said Jeremy Yeo, an analyst at Mizuho in Hong Kong. «On the other hand, the people who may be shorting it could be looking at things from a more near-term earnings basis. If you look at China Modern Dairy numbers over the last 12 months or so, it hasn’t been very good.»
The stock advanced 6.6 percent in the early afternoon, while the Hang Seng Index rose 0.4 percent. Short interest in the stock accounted for 4 percent of outstanding shares on Oct 19, near its highest level since July 2015, and up from a low of 2.4 percent three months ago. The average for members of the Hang Seng Composite Index is 1.4 percent.
The company’s management declined to comment on short interest, according to Wendy Chan, a spokeswoman at Wonderful Sky Financial Group, which represents the company.
China Modern swung to a net loss of 566 million yuan ($84 million) in the first half, from a profit of 477 million yuan a year earlier. The shares are projected to drop 16 percent over the next 12 months, according to the consensus of analysts tracked by Bloomberg. There are six sell ratings, nine neutral recommendations and three buys.
While short sellers may have a chance to profit as the stock corrects after its rally, the shares will continue to climb over the longer term as the outlook for the industry brightens, according to Anson Chan, an analyst at Daiwa Capital Markets Hong Kong Ltd.
A gauge of dairy costs jumped 14 percent in September, the most in almost seven years, according to the United Nations’ Food & Agriculture Organization.