Nov. 25 (NBD) – Stock of infant formula producer China Feihe Limited (06186.HK) resumed trading on Monday and rebounded by 13.38 percent at its peak, closing 10.51 percent higher at 6.94 Hong Kong dollars (89 cents) per share.

The rise of the stock price was largely fueled by the clarification announcement made by the company last Friday against short seller GMT Research's report. 

Photo/VCG

Last Thursday, less than ten days after Feihe's debut on the Hong Kong stock exchange, GMT Research released a report to question the infant formula maker's high revenue and profitability. The research firm alleged that Feihe might post fraudulent cash flow as the company hasn't paid dividends to shareholders for years, and consequently warned investors to avoid buying the shares. 

Impacted by the report, shares of Feihe dipped by 6.55 percent on the day to close at 6.28 Hong Kong dollars per share and the trading was suspended on the next day.

According to its announcement, Feihe called GMT Research's report is "groundless and untrue", as it demonstrated its solid cash flow by listing the six banks where it has had RMB deposits balances of over 200 million yuan (28.4 million U.S. dollars) as of September 30, 2019. 

With regard to the dividend payout, Feihe responded that the reason it didn't do that in the past few years is to facilitate the company's business development and fund management. But on October 14, the company declared a special dividend of 3 billion Hong Kong dollars to shareholders, and also intended to offer shareholders no less than 30 percent of its net profits for each financial year after the listing.

Moreover, Feihe noted that it maintained a relatively high profit margin, primarily because the company has been placing the focus on high-end infant formula products, which have high gross profit margins and contributed an increasingly larger portion to its sales.

National Business Daily noticed that since the beginning of 2019, apart from Feihe, other dairy product makers including Ausnutria Dairy Corp Ltd (01717.HK), China Mengniu Dairy Co Ltd (02319.HK) have been fired at by short sellers as well.

An analyst from a securities company commented that dairy companies are likely to be targeted by short sellers due to the relatively closed industry chain of the dairy market and the seriousness of food safety issues, especially at a time when those companies are flexing their muscles to catch up with the foreign counterparts.

It's worth noting that GMT Research once shorted JD.com, Anta and other leading companies. Despite fluctuations in a short period after the short-selling reports, these companies presented a strong growth momentum in stock performance. 

"The past experience showed that as long as the stock fundamentals are solid enough, the short-selling report could only influence the stock to a very limited degree," said Zeng Rongfei, a former senior analyst with a securities company.

"The report won't impact the business operation of Feihe," Zeng added. In the long run, Feihe still enjoys enormous development space especially in second- and third-tier cities, concluded Zeng.

Email: lansuying@nbd.com.cn