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  "documentTitle": "China Huishan Dairy Holdings (6863 HK)",
  "authorId": "51_Muddy_Waters",
  "authorName": "Carson C. Block",
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  "presentationDate": "2016-12-16 00:00:00",
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  "notes": "This is a research note page focusing on forensic accounting red flags. It uses specific financial data points to build a case for fraud.",
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      "text": "In our experience, one of the most common signs a company is forging its cash balances is borrowing more money than it seemingly needs to, and at rates higher than what it earns on its cash.",
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      "text": "In addition to what could be a cow farm PP&E overstatement as large as RMB 1.6 billion, we have substantial concerns about other asset accounts. Even forgetting the evidence of fraudulent profits, Huishan's cash balance is highly suspicious due to the company's nonsensical capital structure. Huishan's inventory presents a significant red flag. We strongly doubt Huishan's reported raw material prepayment balances. Huishan appears to be hiding a RMB 1.5 fair value loss on biological assets (cattle).",
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      "text": "Huishan reported a big blow out in inventory of “semi-finished and finished goods” in FY2016, more than doubling from RMB 463 million in 2015 to RMB 987 million in 2016. In 2014, it was only RMB 189.7 million. While the company does not provide insight into such inventories in its FY17 interim report, it does cite the “exceptional” case of sales of 13,484 tons of dairy ingredients (whole milk powder) for over RMB 171.4 million. It appears then that the inventory blowout of prior years was in part because Huishan converted raw milk it couldn't sell into whole milk powder. As the shelf life for whole milk powder is limited and the company",
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      "text": "Despite these strong results, Huishan is borrowing at rates far higher than it purports to receive on its cash and short-term investments. In early 2016, Huishan invested RMB 845 million in WMPs at 3.2% to 3.8%, but then in April 2016 attempted to secure RMB 1 billion through a dairy cattle sale and leaseback scheme at 6.2%. After the initial cow sale and lease back fell through, the company announced a new replacement RMB 750 million sale and leaseback agreement at the same interest rate. According to a newspaper report, Huishan is planning the sale of its own WMP at an annual rate of 7.2% for 183-day paper.",
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      "text": "Huishan's recent capital market activity supports our view that the company is a fraud – particularly considering its strong reported 1H17 cash flow. In our experience, one of the most common signs a company is forging its cash balances is borrowing more money than it seemingly needs to, and at rates higher than what it earns on its cash. Huishan fits this profile. It reported cash and short-term investments of RMB 9.8 billion in 1H17, up from RMB 4.1 billion as of FY16. From March 31, 2016 through September 30, 2016, Huishan reports operating cash flow of RMB 3.1 billion and levered free cash flow of RMB 2.7 billion.",
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      "text": "Footnotes 94-103",
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      "kind": "title",
      "text": "We Believe Huishan's Asset Accounts are Massively Overstated",
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      "text": "Huishan's inventory presents a significant red flag.",
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      "text": "Huishan's cash balance is highly suspect – even forgetting that its profits are fraudulent.",
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