By CHEN Qixin

Yili, China’s largest dairy company, has withdrawn from the restructuring of Huishan Dairy Holdings. Huishan has been struggling for three years since its stock price plummeted upon allegations of fraud. Since then, the company has filed for bankruptcy, entered restructuring and been delisted from the stock market.

“After Yili left, the priority is to produce a new restructuring plan, and convene a meeting of everyone they owe money to,” said one of Huishan’s creditors.

With its billion dollar debt and no clear route to a resolution, Huishan’s future is more uncertain than ever.

Bye-bye Yili

Youran Livestock, a Yili subsidiary, withdrew its bid to take part in Huishan’s restructuring, and suspended months of revisions to a restructuring proposal, according to a document issued in early April.

One creditor confirmed the new development, and told Jiemian News that the collapse of the deal was due to discontent in both sides. Huishan’s creditors were displeased by the Yili restructuring plan, while Yili’s due diligence of Huishan might have been expected to raise a few eyebrows. Yili is yet to comment on its withdrawal.

There is no obvious new candidate to take over from Yuli and a revised plan is still in the pipeline.

Open questions include whether and how current income can be used to repay obligations.  Huishan has been soldiering on during financial difficulties. Thanks to an uptick in dairy prices last year, its performance improved slightly, but not enough to make even a dent in the mountain of debt.

A source close to the matter told Jiemian News that the negotiation with Yili was close to completion when it collapsed. The local government might have intervened, and Yili wavered out of concern for its own financial interest.

“The pandemic has obviously slowed things down. The restructuring may drag on,” he said.

Yili is not the only dairy company involved. Bright Dairy bid for two of Huishan’s assets (Huishan Dairy Jiangsu and Huishan Livestock Jiangsu) in December 2019 and closed the deal for 751 million yuan (around US$106 million). This was seen as the first milestone, but the deal did not resolve any problems. Bright Dairy is only taking over the assets and plans to leave the associated debt behind. The takeover is “in progress,” and some Bright staff are already working with Huishan.

“Huishan assets were to be spun off and its livestock business sold,” Song Liang, a dairy industry expert, told Jiemian News. “We don’t know if any new strategy can be proposed.”

Whoever takes over from Yili, the consensus in the industry is that enormous debt makes for a formidable challenge.

Billion Dollar Dilemma

At the end of 2016, US short-seller Muddy Waters issued two reports questioning Huishan’s earnings. It claimed that Huishan’s profits were exaggerated by as much as 1.6 billion yuan as the company concealed the cost of pasture feed from third-party suppliers and other expenditure. It also pointed out that Chairman Yang Kai had misappropriated at least 150 million yuan of company funds, and that Huishan was “on the brink of default” due to its high leverage.

Huishan’s stock initially was unaffected as the company denied the allegations. But on March 24, 2017, its price plunged by 85 percent, the largest single-day percentage drop of any company on Hong Kong Stock Exchange. Huishan suspended its stock, but still denied claims of financial fraud and Yang Kai’s misappropriation of company funds. It confirmed, however, that it had lost contact with Ge Kun, an executive director in charge of treasury, and that the company was delinquent on its corporate debts. A few days later, in a conference with creditors, Yang Kai acknowledged that Huishan’s capital chain was broken.

In late November 2017, Huishan’s creditors filed a petition for bankruptcy and restructuring with a Shenyang court. Repaying debts, however, would prove to be a formidable task: a 38-billion-yuan task, according to a file issued in August 2017.

Yili entered the picture in the summer of 2019. A proposal revealed that Yili would invest 1.5 billion yuan to take over Huishan’s debt and reorganize the group. The plan was to swap shares in the restructured Huishan at market price for stocks of Yili’s Youran Livestock after it goes public in Hong Kong. Yili confirmed its participation in the public bidding for the Huishan restructuring and said that “negotiations were underway.”

Yet Yili and Huishan’s 2000 creditors failed to agree on terms. In October 2019, the two parties convened again. The creditors asked Yili to submit a revised restructuring proposal within two weeks, as well as “provide guidelines for the next steps.”

Meanwhile, the situation continued to ferment. In December 2019, Hong Kong Stock Exchange delisted Huishan’s stocks, which had not resumed trading after the suspension in March 2017. This, however, would not have much effect, according to its creditors, since the new proposal jointly compiled by Yili, Huishan’s management and the party in charge of asset restructuring was already under the review with financial institutions.

As our phone calls to Huishan go unanswered, Yili’s exit casts a giant shadow over Huishan’s future. With debt unrepaid, Huishan faces liquidation if it fails to find another savior.