Hall of Shame

Consumer Staples

China Feihe Ltd (6186 HK)

Year: 2019

China Feihe Limited is an investment holding company mainly engaged in the production and sale of dairy products and the sale of nutritional supplements. The Company's main products include infant milk formula products, adult milk-powder, liquid milk, goat milk infant formula, and a small amount of soybean powder, among others. The Company's milk formula product series include super-premium Astrobaby, Super-premium Organic Zhenzhi and so on. The Company conducts its businesses within the domestic market and to overseas markets such as the United States.

March 2013 - The Company was listed on the NYSE and taken private in by the Company Chairman in a deal was worth US$147M. See our page on Feihe International.

November 2019 The Company listed on the Hong Kong Stock Exchange (HKEx) and raised HK$6.70B in its IPO. Additional share offerings in May 2020 raised another HK$4.72B.

November 21, 2019 GMT Research released a report "CHINA FEIHE (6186 HK) AVOID: Fake or fabulous?".  In the report GMT noted that in just a few years, China Feihe had transformed from a run-of-the-mill producer of infant formula into the market leader in the super-premium segment. That the company reported stellar revenue growth and world-beating profitability, resulted in free cash inflows and a massive cash pile. Despite this, Feihe had historically failed to pay dividends. Instead, a proposed dividend to pre-IPO shareholders could be funded from IPO proceeds. GMT believed that high levels of profitability combined with a lack of dividends are fraud-like traits and there was a risk that Feihe was more fake than fabulous. GMT recommended that Investors should be cautious and verify Feihe’s market position before investing; otherwise, avoid the stock.

November 22, 2019 China Feihe issued a clarification announcement which said that the allegations against the Company in the Report were groundless or untrue statements. In its rebuttal of GMT's report, Feihe revealed that it had paid the pre-IPO dividend prior to listing, and said it had no plans to change the use of proceeds disclosed in the prospectus, around 40%, or HK$3bn, of which would be used to repay offshore debts, with the remainder spent on M&A and other internal spending.

April 29, 2020 Having reviewed China Feihe 2019 results, GMT released a follow up brief report on China Feihe; "ACCOUNTING INSIGHTS - China Feihe". GMT stood by it's recommendation to avoid the stock.  On the issue of GMT's belief that IPO proceeds would be used to fund a large dividend, GMT noted that recently released full-year financials shoed that the proceeds were used as security for, and presumably repayment of, an overdraft…which it used to pay the dividend. So, GMT noted they were both right. GMT believed that Feihe had traits similar to past frauds in that it was unusually profitable and had large cash balances. By failing to remit cash from China to Hong Kong, it had yet to verify that profits were real.

July 7, 2020 Blue Orca Capital released a short report on China Feihe.  In its report, Blue Orca stated the following allegations:

  •  Revenue inflation via undisclosed related party logistics company. Feihe was recognizing revenue when it passed products to a logistics firm which was part of Feihe.
  • Nielsen and Ministry of Commerce data suggested Feihe Overstates Revenues. In Blue Orca's opinion, Feihe’s actual revenues were 49% less than reported by the Company in 2018-2019.
  • Feihe understates billions in operating expenses; hidden staffing costs and headcount understated by 10x and understated advertising expenses.  Such undisclosed expenses indicate that Feihe is considerably less profitable than it claims.
  • Ghost factory and questionable tax refunds. Blue Orca doubt that Feihe Tailai could generate billions of revenues and pay hundreds of millions in taxes in 2018-2019 while its only factory was still under construction.
  • Feihe overstates billions in capital expenditures. Company was undertaking facility expansion projects which were already completed before its IPO.
  • Major audit red flags - Five PRC subsidiaries were not audited by any firm in preparation for the IPO,  Feihe’s key sales subsidiary was audited not by E&Y (or its local affiliates), but a local Heilongjiang accounting firm with a questionable reputation.
  • The Original China Hustle - Feihe traded as a US-listed company for 10 years. Although it initially soared, Feihe’s stock plummeted when it was revealed that the Company’s assistant auditor was also its stock promoter. Feihe then restated historical financials, admitting that its net income had been overstated in one year by 29%.
  • Same Business – Different Result? Selling the same products in the same market to the same customers, Feihe was a failure as a US-listed reverse merger. Yet away from the scrutiny and oversight of regulators, auditors and investors, Feihe supposedly experienced a dramatic change of fortune; Booming Revenues, Expanding Margins; Better Business than Apple and Microsoft?
  • Curious Case of YST. Feihe purchased between 78-96% of its fresh milk from Hong Kong listed YuanShengTai Dairy Farm Limited (“YST”). YST was originally owned by Feihe’s chairman. Now, Feihe claims that YST is no longer a related party. But evidence suggests otherwise. On the website of an investment platform called Max Wealth, owned in part by Leng Youbin, Feihe’s chairman brags that he not only runs Feihe but is also the actual controller of YST.

In conclusion, Blue Orca believed that Feihe’s story had more in common with Wirecard and Luckin Coffee than Apple or Tencent.

July 9, China Feihe issued a clarification announcement refuting Blue Orca's allegations.  It said that the allegations were groundless or untrue statements. The clarification then addressed the issues raised by Blue Orca.

GMT Research: CHINA FEIHE (6186 HK) AVOID: Fake or fabulous?, 21 Nov 2019
China Feihe: Clarification Announcement, 22 Nov 2019
SCMP: Chinese baby milk maker suspends shares as report urges investors to steer clear, 22 Nov 2019
GMT Research: ACCOUNTING INSIGHTS - China Feihe, 29 Apr 2020
Blue Orca Capital: Short China Feihe, 7 Jul 2020
China Feihe: Clarification Announcement, 9 Jul 2020
China Feihe: Clarification Announcement (2), 9 Jul 2020
China Feihe: Annual Report YE Dec.2019
China Feihe: Prospectus October 2019