- A report by GMT Research advised investors to avoid the stock because the company hadn’t paid a dividend in the five years before IPO
- China Feihe has rejected the report’s findings and said it will issue a clarification about the allegations
China Feihe, the mainland's largest domestic maker of baby milk formula, suspended trading of its shares before the market opened on Friday, a day after an independent research firm urged investors to avoid the stock as it may become the target of short-sellers.
The company, which had only traded in the Hong Kong stock market for seven days, will issue a clarification about the allegation raised by the GMT Research report released on Thursday, said chairman Leng Youbin in a stock exchange filing on Friday morning.
China Feihe priced its IPO at HK$7.5 per share, the lower end of an indicative range, to raise HK$856 million, making it the seventh-largest offering in Hong Kong this year. The company started trading on the Hong Kong exchange on November 13. Its share price fell 16 per cent to close at HK$6.28 on Thursday.
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The GMT report, which is aimed at subscribers only, recommended investors "avoid" the stock as it may be a target of short-sellers in the future. A copy of the report, authored by analyst Nigel Stevenson, was obtained by the Post.
Beijing-based China Feihe, whose products are endorsed by the actress Zhang Ziyi, who starred in Crouching Tiger, Hidden Dragon, has strong revenue and profit but had not paid any dividends to its shareholders during the five years before its flotation. Instead, the company used part of its IPO proceeds to pay a dividend to its pre-IPO shareholders.
"Unfortunately, high levels of profitability combined with a lack of dividends are fraud-like traits," Stevenson said in the report.
"There is a risk Feihe is more fake than fabulous. It is not currently possible to short the shares, but Feihe is an obvious future target for short-sellers. Investors should be cautious and verify Feihe's market position before investing; otherwise, we recommend they avoid the stock."
China Feihe told Chinese media it rejected the report's allegations.
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GMT Research is an accounting research firm based in Hong Kong. It is regulated by the Securities and Futures Commission (SFC) and has held a licence to give financial advice since 2014.
"We make our money from subscribers who pay an annual fee and are all institutional investors. We are not a short-seller and do not take positions in any of the companies we write about," Steveson said in a in a written reply to the Post.
"Specifically, we do not have any position in China Feihe's shares or any related securities.
"We stated in the report that it is not currently possible to short the shares. This was a factual statement: the stock has only just listed and is, therefore, not on the Hong Kong Exchange's list of securities eligible for short selling."
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