It took more than a decade for Yang Kai to amass one of China’s most celebrated dairy fortunes.
He may have lost it in less than 90 minutes.
The chairman of China Huishan Dairy Holdings Co., who turned a former arm of the state into what he had described as an industry-leading innovator, is now battling for the company’s survival after a remarkable series of events over the past two weeks laid bare the extent of Huishan’s money troubles. The milk producer’s sudden tumble in Hong Kong trading on March 24 cut the value of Yang’s stake to $530 million from $3.6 billion.
Much of how his company got into this crisis is unclear. But the story of Yang’s rise — pieced together from regulatory filings, Huishan’s promotional materials and disclosures from lenders — shows a heavy reliance on debt that left both the chairman and his firm with little room for error. For investors in Chinese companies, it’s another reminder of the dangers of high leverage and low transparency after corporate defaults in Asia’s largest economy swelled to a record in the first quarter.
Yang not only oversaw a doubling of Huishan’s debt-to-equity ratio since 2013, he also pledged almost all his controlling stake for personal loans. And it was only after the stock plunged that Huishan disclosed the scale of Yang’s borrowing, the firm’s inability to pay its debt on time and the disappearance of the executive in charge of its finances.
Even if the company avoids default by convincing the local government to intervene — or by finding a “white knight” to inject fresh capital — Yang is likely to lose control of Huishan, according to Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. who met the dairy magnate at a dinner event in September 2015.
“There was no indication at that time that there was so much debt,” said Yuen, who described Yang’s demeanor as confident and proud. “I expected the share price to deflate, but I definitely didn’t expect it to blow up like this.”
Huishan didn’t respond to emails requesting an interview with Yang, while calls to the company’s investor relations lines in Hong Kong and its headquarters in Shenyang, China, weren’t picked up. Nobody answered the doorbell at Huishan’s Hong Kong office during business hours on March 28. The stock has been halted since March 24.
Like many publicly-traded Chinese firms, Huishan traces its roots to the country’s state-owned sector.
The Huishan brand was originally developed by Shenyang Dairy, a government-run company that Yang joined as general manager in 2002. Yang acquired an ownership stake soon after Shenyang Dairy privatized, and by 2012 he and Ge Kun — the missing executive described as Yang’s “right hand” by Chinese media — controlled what eventually became Huishan Dairy. The company went public on Hong Kong’s stock exchange in 2013, when Yang was 55.
Huishan advertised itself as an industry pioneer. It claimed to be the nation’s only “grass to glass” dairy company, owning every step of the supply chain from the alfalfa fields that fed its cows to the final packets of milk delivered to supermarket shelves.
Creditors of all stripes stepped up to offer financing. Banks including HSBC Holdings Plc extended conventional loans, while the shadow finance industry provided more esoteric forms of debt. Huishan borrowed from a peer-to-peer lending platform in February at an annualized rate of about 13.5 percent and sold debt to private investors on a small regional exchange at rates of around 7 percent. In one creative attempt to acquire funding, the company even agreed to sell some of its cows to a leasing firm and then rent them back.
By the end of September, Huishan had a debt-to-equity ratio of 124 percent, compared with the 28 percent average for packaged-food companies listed in China and Hong Kong, according to data compiled by Bloomberg.
Yang also leveraged up his stake in the business, mostly without informing stockholders in Hong Kong. The exchange’s rules allow a controlling shareholder to borrow against a stock and not disclose the transaction, so long as the loans are for personal finance reasons.
Huishan detailed Yang’s exposure in a statement after the crash. Champ Harvest Ltd., an entity controlled by Yang and part-owned by Ge, holds almost 71 percent of the milk producer’s shares, with nearly all of them used as collateral for margin debt, loans to Champ Harvest and financing for Yang’s other companies, Huishan said. Champ Harvest also took an equity stake in Jilin Jiutai Rural Commercial Bank Corp., Huishan’s second-largest bank creditor.
The disclosures suggested Yang’s net worth may have been smaller than what many had assumed. He was known nationally as China’s “dairy billionaire” after appearing in the annual rich lists compiled by the Hurun Report starting in 2014. By 2016, he was ranked 66th with a fortune of $3.88 billion.
Yang used his public profile to pitch Huishan as a safe provider of milk for Chinese consumers after the nation’s melamine scandal of 2008 devastated the industry and killed at least six infants.
“When others were using underhanded means to snatch market share and capital, I created the most perfect supply chain,” Yang said in one of Huishan’s undated promotional videos, speaking over soaring music and images of waterfalls and alfalfa fields. “I’ve fulfilled my dreams, but Huishan has its own dreams: of 1 million cows, 100 year-old stores and a 100 year-old brand.”
The company was still a long way from reaching those goals as of its latest half-year reporting period in September. By the end of that month, Huishan operated 81 farms and had 196,996 dairy cows. Its revenue for the previous 12 months totaled 4.91 billion yuan, compared with almost 54 billion yuan at China Mengniu Dairy Co. in the year ended December.
Not everyone believed Huishan’s numbers. Carson Block, the short seller and founder of Muddy Waters LLC, alleged in December that the company had overstated its sales, misrepresented its self-sufficiency in alfalfa and made an unannounced transfer of assets to an entity controlled by Yang. Huishan said the allegations were groundless and contained misrepresentations.
The company’s latest blow came on March 31, when Huishan disclosed that its four remaining non-executive directors had resigned, citing other commitments. Ge is still unreachable, Huishan said, adding that it filed a missing person report with the Hong Kong police. Her last correspondence was a March 21 letter to Yang explaining that stress had taken a toll on her health.
Huishan, which now has zero board members on its audit committee, said it couldn’t provide an update on its finances. The company is working with local government officials on a restructuring plan and has asked creditors to refrain from calling in outstanding debt, according to Hongling Capital, owner of the P2P lending platform that brokered loans from individual investors to Huishan in February.
Ge’s disappearance could complicate the process. Some of Huishan’s borrowing agreements, including a $50 million loan from Bank of China Ltd., a $20 million loan from HSBC and a $200 million syndicated loan from banks including China CITIC Bank International Ltd., stipulate that Yang and Ge must remain Huishan’s largest shareholders.
Minority investors, meanwhile, are left with little to do but wait. Huishan said on March 31 that the shares will remain suspended in Hong Kong.
“It’s really bad,” said Alex Au, managing director of Alphalex Capital Management in Hong Kong. “Companies with this kind of market cap in Hong Kong shouldn’t have something like this happen.”