Chinese Baby Milk Formula Maker Feihe Denies Fraud Allegations, Halts Trading
Luan Li
/SOURCE : yicai
Chinese Baby Milk Formula Maker Feihe Denies Fraud Allegations, Halts Trading

(Yicai Global) Nov. 22 -- China Feihe, the country's largest infant milk formula producer, has halted trading on the Hong Kong stock exchange as it prepares a robust defense against accusations of fraud by a financial research firm GMT Research.

Despite declaring cash flows amounting to CNY6 billion (USD852.7 million), equal to half of the firm's operating revenue, and a profit margin of 26 percent in the fiscal year 2018, the Beijing-based firm has not paid any dividends to shareholders in the past five years, Hong Kong-based short seller GMT said in a report Feihe: Fake or Fabulous? published yesterday.

GMT has doubts about the authenticity of the company's funds and is concerned that the baby milk powder maker might use a portion of its income from its initial public offering last week to pay the huge amount of dividends owed to its shareholders before the listing. GMT has advised investors not to buy the firm's shares.

Feihe denies all of the report's charges, it told Yicai Global today. The accusations are completely inaccurate and groundless and will seriously mislead investors, it said. The firm is filing documents in response.

It might be that Feihe has not made false statements, GMT said, but it has given no convincing reasons for the company's rapid transformation. It has been the fastest-growing milk powder producer in China for the last two years, according to consultancy firm Frost & Sullivan.

Feihe listed on the Hong Kong stock exchange on Nov. 13, issuing 893 million shares at HKD7.50 (USD0.95) each. Yesterday, its shares [HKG:6186] closed at HKD6.28 (USD0.80), down 16.5 percent from the issuing price. Trading was suspended today.

The firm had previously declared in its IPO prospectus that it would use 40 percent of the proceeds for the repayment of offshore debts, 20 percent for acquisitions, 10 percent on investments in Canada, 10 percent on overseas research and development of infant formula and nutritional supplements. The remainder will be invested in its US unit, nutritional supplement firm Vitamin World, with 5 percent going towards expansion, 5 percent for marketing and 10 percent as additional working capital.

GMT's analysis mainly focusses on Chinese companies listed overseas. Lifestyle site 58Tongcheng, e-commerce giant JD.Com, engineering firm China Communications Construction and Zhouheiya Food, supplier of cooked duck and goose meat products, have all previously come under fire.

Short selling is the practice of selling commodities, securities and currencies that you do not yet hold, in the anticipation that falling prices will enable you to buy them at a profit before they have to be delivered.

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Keywords: China Feihe , Baby Milk Formula