After the listing of Huishan Dairy in Hong Kong propelled its chairman Yang Kai to become the wealthiest man in his home province of Liaoning, he described his business as a “dream factory”.
“Creating China’s most trusted dairy brand is our enterprise’s dream,” Mr Yang said in 2015. But abandoned Huishan projects in rural China show signs that the dream was under strain even before the company’s shares — against which he borrowed hundreds of millions of dollars — plunged 85 per cent with no warning in Hong Kong last month.
In the Kangping development zone in Liaoning province, where Huishan in 2014 said it was investing up to Rmb8.8bn ($1.2bn), a red metal archway emblazoned with the name “China Huishan Dairy’s Dairy City” leads only to a few abandoned shacks. The only cows visible in the zone are a herd of sculptures by a roadside.
Six large corrugated metal sheds with concrete stalls for hundreds of cows stand empty a few hours’ drive away near the village of Wanhe, the remnants of a Rmb100m project to house 3,000 cattle begun in 2014. “It’s not been finished. They ran out of money,” says Wang Pingkai, a man who guards the facility.
Huishan’s share price crash last month wiped out about three-quarters of the value of Mr Yang’s $3.7bn personal fortune, according to Rupert Hoogewerf, who tracks China’s wealthy and added that it was the “biggest ever” sudden decline in personal wealth that he had seen.
Mr Yang’s rise was more gradual than his fall. He rose through the ranks at a state-owned food company in Liaoning in the 1990s before becoming manager of Shenyang Dairy. He gained control of the company in the early 2000s when it was privatised.
Rebranded as Huishan, the company was poised to benefit from a dairy investment rage sparked by former premier Wen Jiabao, who in 2006 expressed a “dream” that all Chinese children should enjoy dairy products every day. Consumption grew at double-digit annual rates.
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The company’s initial public offering in Hong Kong raised $1.3bn in 2013, valuing the group at $4.9bn and making Mr Yang a billionaire — and a business personality keen to promote his connections.
“They made a big fuss about the fact that Li Keqiang [now China’s premier] had come from Liaoning, suggesting they had a special relationship with him,” says David Mahon, a Beijing-based dairy investor.
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State-owned companies still dominate north-east China, making official ties more crucial than in other regions. Mr Yang “places great stress on yiqi”, says Song Liang, a dairy analyst who met him several times, referring to a spirit of “fraternal honour” celebrated by men from north-eastern China.
But pressures on dairy groups mounted after 2013. Consumption growth slipped as China’s economy slowed, and milk prices fell after a sanctions-related ban by Russia produced a global glut. Domestic producers struggled to compete on trust, price and quality with international companies. Some of China’s biggest private dairies by market share — such as Mengniu, the second largest — began to report losses.
Mr Yang “has been under a lot of pressure, because the overall dairy sector has been a bad state for two years”, Mr Song says. “But he doesn’t display his stress or problems.”
Indeed, Huishan in its 2015 annual report boasted that its profitability was “far higher than the average level of the industry”, reporting profits of Rmb1.6bn from sales of Rmb4.5bn.
“It was doing too well. Far too well,” says Mr Mahon. “The story always sounded implausible. That was the view we took and it was held reasonably broadly in the industry.”
An address listed for Mr Yang in Shenyang leads to an exclusive compound of villas named “Shangri-La”, where several buildings are labelled with Huishan’s name. A police car with three officers was parked outside the listed address, which staff indicated as a showroom for buying property.
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Meanwhile, Mr Yang kept raising his stake in the company from 50 per cent to almost 75 per cent in the past two years. His purchases, and share buybacks by Huishan, kept the company’s shares stable.
He also borrowed heavily. Mr Yang pledged 71 per cent of Huishan’s shares as collateral for loans. Proceeds were used for share trading as well as loans to himself, his main vehicle Champ Harvest, and his other businesses.
The FT has found more than 50 companies either registered under the names of Mr Yang and his business partner Ge Kun or controlled by the pair, from renewable energy to real estate and banking.
Huishan Dairy engaged in meat production, according to project tendering announcements posted online — a business line that it did not disclose in its annual reports. In 2015, Huishan bought an energy company controlled by Mr Yang for Rmb80m.
Last May, the company said it was selling one-quarter of its herd for Rmb1bn ($152m) in a leaseback deal involving a financing company based in the southern Chinese province of Guangdong. That announcement seemed “funny” to US short seller Carson Block, whose group Muddy Waters then published a report alleging fraud by Huishan. But “even if the financials had not been fraudulent, it’s a crushing debt load”, Mr Block says.
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Huishan denounced the Muddy Waters report as “malicious and false” and days later, Mr Yang spent HK$58.8m ($7.6m) adding to his shareholding.
Last week the company admitted it was late making interest payments and that Liaoning officials had called a meeting with Huishan’s creditors the day before the share price collapse. The company has promised an update to investors this week.
Meanwhile, Mr Yang has not been seen in public since the shares collapsed, while his business partner Ms Ge — who oversaw Huishan’s treasury operations — has been reported missing.
Source: FT
Link: https://www.ft.com/content/1285f4e0-19db-11e7-a266-12672483791a