Hall of Shame

Consumer Staples

Feihe International Inc (ADY US)

Year: 2013

Feihe International, Inc. was a producer and distributor of milk powders, soybean milk powder and related dairy products in the People’s Republic of China. The Company made products that were formulated for particular ages, dietary needs and health concerns. Its main product was infant formula, which accounts for approximately
2/3 of its sales and most of its gross profit.

May 7, 2003, The Company listed in the US via a reverse merger of American Flying Crane Corporation, or AFC, a Delaware corporation that operated a dairy business in China through various subsidiaries. In connection with that acquisition, it changed its name to American Dairy, Inc. It started trading on the New York Stock Exchange (NYSE) in April 2005.

April 13, 2010, The company dismissed it's auditors, Grant Thornton. It said that Grant Thornton’s reports on the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2009 and 2008 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except that the report as of and for the fiscal year ended December 31, 2009 GT noted a material weakness.  Grant Thornton expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting due to the existence of the following material weakness related to the accounting treatment for routine and non-routine transactions: “The Company did not effectively and timely assess the accounting treatment for transactions, including sales, purchases, government subsidy income, and operating expenses.” Deloittes were engaged to replace them.

In October 2010, the company changed its name to Feihe International, Inc.

February 12, 2011 Sequoia, Feihe's venture capital partner ended it's co-operation with the company.  Feihe would have to refund Sequoia's total investment of $63 million, plus about $2 million in interest, with four separate payments over the course of the next year.

April 7, 2011 A blogger on Seeking Alpha, Grahamolyte Investor (GI), published an article; "Feihe International's Rough Financial Position". A synopsis of the article said: Feihe had serious financial problems. The company was heavily indebted, yet had a history of producing negative cash flow and no immediate prospects for operating improvements. It was highly questionable whether or not Feihe should have been considered a going concern. Feihe was relying on the kindness of its PRC bankers to remain alive at that moment, but with huge near term payment commitments, this kindness would be tested. In order to survive long term, GI believed Feihe would need to raise at least an additional $100m in equity capital.  Yet, Feihe was a Chinese RTO that had already burned through three other private equity funds’ money, had negative cash flow, had no proper CFO, and after over five years as a public company in the USA, it still did not maintain effective internal control over financial reporting. In the environment, at that time, for Chinese RTOs, an equity raise would have been difficult and the pricing horrible. The early redemption by Sequoia in February 2011 and the departure of the CFO in November 2010 completed the story and confirmed that insiders had known for a while that it was time to get out. GI believed existing investors in Feihe risked either insolvency or a massive dilution in their holdings.

December 23 2011 Feihe dismissed it's auditors, Deloitte Touche Tohmatsu CPA Ltd. It said that DTTC’s report on the Company’s consolidated financial statements as of and for the fiscal year ended December 31, 2010 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except that it included an emphasis paragraph on the substantial doubt about the Company’s ability to continue as a going concern.  Crowe Horwath (HK) CPA Ltd. were engaged to replace them.

September 5, 2012 Another blogger, ClearwaterBay, on Seeking Alpha published an article "Feihe: Tainted Future Of A Cashless Cow".  A summary of the points raised in the article are as follows:

  • Feihe was losing market share in its core powdered milk business,
  • Heavy marketing could not save its out-dated business model
  • Feihe's sustainable earnings were much lower when adjustments were made to measure its pure operating performance.
  • Upstream ownership and management represented the new paradigm shift in China's modern dairy industry that had been forced to become increasingly quality driven.  Feihe's inability to compete and manage effectively in this key area had led to Feihe selling its dairy cow farms which were considered a long-term strategic core competence for most domestic Chinese dairy companies - detrimental to Feihe's future.
  • To avoid working capital deficiency Feihe was forced to sell valuable assets including the strategically important dairy farms.
  • If Feihe could not "milk" growth even in the Year of the Dragon, then the next year, the Year of the Snake, would certainly bite Feihe's bottom line deeply. 
  • Three different auditors in less than two years, CFO and VP Finance both unqualified for US GAAP, and self-admitted material weakness in its internal control over financial reporting expose investors to high financial accounting risk.
  • Recurring management misguidance had repeatedly entrapped investors and had befallen even some of the top institutional investors in past years.

In conclusion, ClearwaterBay wrote that while the China diary industry as a whole was expanding rapidly and investing heavily into the dairy upstream, Feihe had been moving backwards and giving up its ability to contend as a legitimate dairy player with a fully-integrated and quality assured production process. Unable to compete in the free market, Feihe was resorting to government subsidies to buttress its earnings and increasing reliance on bank debts to keep it on life support.

September 17, 2012 ClearwaterBay, on Seeking Alpha published another article "900,000 Reasons To Sell Feihe".  The two main issues raised in this article were:

  1. Feihe's management had been touting their dairy products as untainted, giving the U.S. investors a sliver of hope that somehow this "pureness" could be monetised in a growing market. Through years of management's countless road shows, conference calls and public releases, Feihe had been lying to the U.S. investors by inculcating a pristine image of itself in a tainted marshland of Chinese domestic infant formula - unscathed and above its peers.
  2. However, the truth was totally the opposite -- on the other side of the world, the Chinese consumers and media had spoken loudly against Feihe's consumer fraud. Consumer complaint cases against ADY had skyrocketed in the previous two years in China. "Trust Gate" was the term used extensively by the Chinese media starting in late 2010 to describe Feihe's unethical and illegal practice of selling tainted dairy products, conducting illegal marketing practices and falsely advertising on its product quality. There have been mountains of evidence against ADY from the Chinese dairy consumers to Chinese national and regional media to Chinese consumer associations.  One Chinese investigative reporter who exposed Feihe mentioned that in 2010 when he did an Internet search with the Chinese key words 飞鹤奶粉"Feihe milk powder" and 投诉"consumer complaint/lawsuit" on the Chinese search engine Baidu he found about 190,000 related articles. This week ClearwaterBay did an exact same search on Baidu, and Feihe consumer complaint/lawsuit related articles had reached 908,000!

ClearwaterBay finished saying that it had notified the U.S. regulators and the SEC regarding Feihe's material misrepresentation of facts and accounting irregularities and PCAOB, regarding Feihe problematic financial statements and auditor's possible negligence in audit procedures, including the mandatory analytical reviews. ClearwaterBay also provided additional documentation to both the SEC and PCAOB, comparing the huge discrepancies between Feihe's SEC financial filings and its PRC's SAIC and SAT official reports that Feihe would need to reconcile dating back to fiscal year 2008.

March 4, 2013, Feihe announced a "going private" proposal, by the Company Chairman, to take the company private.  The deal was worth US$147M with shareholders offered US$7.40 per share.

April 16, 2013 Feihe delisted from the NYSE.

The company listed, as China Feihe Ltd on the Hong Kong Stock Exchange (HKEx) in November 2019 and raised HK$6.70B in its IPO.  See our page on China Feihe for more information.

Feihe International: Change Of Auditor, 13 Apr 2010
China Daily: Sequoia quits Feihe, 12 Feb 2011
Seeking Alpha: Feihe International's Rough Financial Position, 7 Apr 2011
Feihe International: Change Of Auditor, 23 Dec 2011
Seeking Alpha: Feihe - Tainted Future Of A Cashless Cow, 5 Sep 2012
Seeking Alpha: 900,000 Reasons To Sell Feihe, 17 Sep 2012
Private Equity International: MSPEA in $147m Chinese take-private, 6 Mar 2013
Feihe International: Annual Report YE Dec.2012
Feihe International: Annual Report YE Dec.2011
Feihe International: Annual Report YE Dec.2010