Muddy Waters Latest report on Huishan

In Part 1, we explained our conclusions that Huishan fraudulently inflates its profit margins, CapEx, and cash balance. In Part 2, we will detail our conclusion that Huishan’s reported revenue is also fraudulent. VAT data from the State Administration of Taxation (“SAT”) show that Huishan reports a significant amount of fraudulent revenue.
Our experts assed that the pre-IPO farms are of poor quality. We asked two China dairy experts to provide independent assessments of the quality of the farm design and construction. Their general responses indicated that these farms are typical Chinese barn designs, were “built cheap” with “poor airflow” and “not built to last.”5 Moreover, they explained that these cost savings come with a cost to production and yield.

They pointed out that it is common knowledge in their industry that the design and construction of cow sheds and related facilities and proper management of the environment and living conditions of the herd “enhances animal performance, comfort and well-being.”6 Huishan’s abundant sloganeering with such messages indicates that they know this too; however, they do not seem to take it to heart.

The experts explained that poor design features seriously undermine the ability of cows to achieve and sustain high yields throughout their lactation period. Poor airflow results in discomfort in the heat of summer and cold of winter (known as heat/cold stress) leading to declining yields, reduced fertility, among other undesirable conditions.7 Good air flow helps flush air born viruses and pathogens out of the sheds which normally house hundreds of head of cattle and is therefore an important for maintaining the health of the herd. Without proper ventilation moisture and ammonia (from the cow urine) will also build up in the air posing health risks and also exacerbating corrosion in the building’s structural framing, roof, and other steel fixtures such as headlocks and cow pen loops.8 Excessive mud, excrement and urine pose not only health risks, but increase the risk of slips and falls that could injure the cows. Certain injuries would require these animals be culled prematurely.9

Dairy Expert A, with significant experience overseeing the development of large-scale farms that supply raw milk to large publicly-traded foreign and Chinese dairy farms, provided specific comments on the shortcomings of the design and construction of Huishan’s farms. His comments fell into two major categories: 1.) design issues that impact production, and 2.) overall construction quality.