---
title: "Has the Myth of the 100-Billion-Yuan Feihe Been Shattered?"
description: "Feihe was shorted today, but after a sharp 8% drop, its stock staged a dramatic rebound, closing up 7.21%. However, dairy experts warn that Feihe should not celebrate too soon, as this may be a probe before the short sellers' full-scale attack. Why has Feihe been targeted?"
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published: "2020-07-12"
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# Has the Myth of the 100-Billion-Yuan Feihe Been Shattered?

> Feihe was shorted today, but after a sharp 8% drop, its stock staged a dramatic rebound, closing up 7.21%. However, dairy experts warn that Feihe should not celebrate too soon, as this may be a probe before the short sellers' full-scale attack. Why has Feihe been targeted?

**Click to read the original article for details**
Source: AI Finance and Economics (ID: aicjnews) Author: Liu Xue'er, Ma Weibing, Editor: Sun Jing
**Feihe was shorted today, but after a sharp 8% drop, its stock staged a dramatic rebound, closing up 7.21%. However, dairy experts warn that Feihe should not celebrate too soon, as this may be a probe before the short sellers' full-scale attack. Why has Feihe been targeted?
**-01-
****After being shorted, Feihe's stock rose 7.21%**
Feihe and its shareholders experienced a thrilling day.
On July 8, short seller Blue Orca released news: **it is shorting Feihe, claiming that Feihe exaggerated its infant formula revenue, overstated operating expenses by billions of dollars, and overstated capital expenditures by billions of dollars. Upon the news, Feihe's intraday decline once exceeded 8%.**
But a dramatic reversal soon occurred: **Feihe issued a statement saying the allegations were inaccurate and misleading, and revealed that the company's revenue for the first half of 2020 is expected to grow by 40%. As of today's close, Feihe's stock price rose 7.21%.**
It seems Feihe withstood the impact of Blue Orca, but dairy expert Wang Dingmian is not optimistic. He told AI Finance and Economics, "**In my personal view, this is a probe and reconnaissance before the short sellers' full-scale attack, a small test of their strength, waiting for the best opportunity to strike hard. Feihe should not celebrate too soon.**"
He further explained that making products, running a business, and building a market all require a down-to-earth approach, emphasizing science and pragmatism. "A smart company should be more standardized and make up for any shortcomings." He seemed to imply something but was unwilling to elaborate.
In fact, **Feihe encountered its first round of short selling on the ninth day of its listing on the Hong Kong Stock Exchange in November 2019.** At that time, short seller GMT questioned Feihe's strong profitability but noted that it had never paid dividends in the past five years, suspecting that Feihe had falsified part of its cash and committed performance fraud.
Feihe subsequently clarified in a timely manner, stating that its high profit margin came from high-end infant formula, and presented tax records and explained its dividend policy. The market then returned to normal. **In less than eight months since its listing, Feihe's stock price has risen 126% from its issue price, with a market value of HK$151.5 billion, surpassing Mengniu to become the highest-valued dairy company on the Hong Kong Stock Exchange.**
But being targeted by short sellers multiple times makes one wonder about the 'cracks' behind Feihe's rapid rise. The most common external criticism of Feihe is its high gross margin. In 2019, Feihe's gross margin reached 70.0%, while that of Ausnutria, Beingmate, and Yashili was 52.5%, 50.1%, and 37.1%, respectively, only 50-70% of Feihe's.
What level does a 70% gross margin represent in the consumer goods sector? It is almost comparable to the highly profitable liquor industry. Looking at the first half of 2019 data, Feihe's gross margin was 67.5%, while Wuliangye, Yanghe, and Shanxi Fenjiu had gross margins of 69.5%, 66.5%, and 65.9%, respectively.
Feihe attributes this performance to the rising proportion of high-end infant formula with higher gross margins, such as the ultra-high-end 'Xingfeifan' and 'Zhenzhi Organic' products.
Image/Visual China
Wang Dingmian previously calculated that domestic infant formula prices have risen by 30%-50% in the past three years, with an average of about 250 yuan per can, and ultra-high-end products priced above 380 yuan accounting for one-third of the market share. The average production cost of a domestic formula can is only about 100 yuan.
It turns out that before 2018, dairy companies relied on multiple formulas to drive sales, but on January 1, 2018, the new formula policy 'Measures for the Registration Management of Infant Formula Product Formulas' was fully implemented. The Measures clearly state that from 2018, infant formula products that have not obtained registration will not be allowed to be sold in China.
After formula restrictions, brands that could previously make 30-50 formulas can now only make a dozen or so, and the decline in output directly affects revenue. Therefore, companies can only tell stories and play the 'high-end card'.
**Although high prices do not necessarily equate to high-end, the effect on corporate profits is immediate.** Thus, high prices have become a lifeline for dairy companies. "Some companies are very smart, incorporating high prices into marketing and advertising expenses as costs, but in the end, the wool comes from the sheep's back, and it's just consumers paying in advance," Wang Dingmian said.
But for dairy companies, if they rely only on marketing, can performance be sustained? This is the second point where Feihe has been questioned by short sellers multiple times.
At least in terms of performance growth, Feihe has clearly slowed down. From 2017 to 2019, Feihe's revenue growth rate fell from 58.07% to 32.04%, gross profit growth rate fell from 86.36% to 36.90%, and net profit growth rate fell from 178.24% to 75.47%, almost all with more than half the decline.
In addition, Feihe, which focuses on infant formula, is more sensitive to the macro environment where the second-child dividend is fading. According to data from the National Bureau of Statistics, after the second-child dividend of 17.86 million births in 2016, China's birth population has declined continuously, with 15.23 million in 2018 and 14.65 million in 2019, and is expected to decline to around 13 million by 2023. This also casts a shadow over Feihe's future.
In response, AI Finance and Economics contacted Feihe, and a relevant person in charge said that the company is verifying business data and other information internally and will announce it after verification. The person in charge did not immediately respond to external questions about slowing performance growth and high gross margin doubts.
**-02-****Taking off through marketing**
If not for this short selling, many onlookers might not have realized that the top spot in domestic formula is occupied not by Mengniu or Yili, but by Feihe.
Feihe's path to the top was not smooth. This dairy company was born in 1962 in Qiqihar, a small city in Heilongjiang, the hometown of red-crowned cranes. In April 2005, Feihe listed on the NASDAQ in the United States and later transferred to the New York Stock Exchange. In June 2013, due to increasingly high overseas financing costs, Feihe completed privatization and delisted from the NYSE, with a stock price of only $2 at the time.
Even during the 2008 melamine incident, Feihe, as one of the few domestic formula brands that remained clean, did not gain much benefit. After all, consumer trust in domestic formula had hit rock bottom at that time. This has been the status quo for Chinese dairy brands for a long time: foreign brands are sought after, while domestic brands are not trusted.
The reversal appeared in **2016. Feihe became the number one local brand with annual sales of 6.8 billion yuan, and thus began its path of counterattack.** The reasons can be summarized as clear marketing positioning and increased channel investment.
In 2015, Feihe positioned its brand in external marketing as 'more suitable for Chinese babies' constitution'. This drew criticism from many industry insiders, who believed it was not in line with reality. An anonymous dairy expert told AI Finance and Economics, "The industry is very averse to Feihe's slogan 'more suitable for Chinese babies' constitution'; it is completely untenable. Now, selling formula requires storytelling to have selling points; many consumers do not buy products from companies that honestly make products."
Image/Visual China
Some industry insiders complained to AI Finance and Economics that **heavy marketing and light R&D is a common problem in the entire dairy industry.** In 2019, Feihe's R&D expenses accounted for only 1.2% of revenue, while sales expenses accounted for 28.0%.
But Feihe's marketing positioning did indeed refresh ordinary consumers, after all, Chinese people believe that one side's water and soil nurtures its people, and this marketing point can, to some extent, reduce mothers' dependence on imported formula.
In addition to marketing positioning, Feihe has also been rectifying its distributor team and getting closer to the market, organizing activities such as parent-child shows and nutrition education lectures for consumers.
According to financial reports, **as of the end of 2019, Feihe's retail outlets had grown from 58,000 in 2016 to 109,000, and distributors, retailers, and retail stores supported 91% of Feihe's dairy product sales.** In addition, Feihe, which is keen on promotion, held nearly 500,000 offline events in 2019, equivalent to 1,300 events per day. A series of actions also increased Feihe's sales costs by 21% compared to 2018.
Dairy expert Song Liang revealed that **in the past few years, China's third- and fourth-tier formula market has been huge and fragmented, with large differences in consumption preferences across regions, weak brand awareness, and inadequate channel promotion.** He summarized that **the important reasons for Feihe's rise lie in 'strong online brand building, professional and efficient offline promotion, and continuous upgrading of product formulas'**, and believed that 'this institutional short selling has hit a steel plate'.
Image/Visual China
**-03-****Also shorted, some fall like dominoes, others become 'tumbler dolls'**
This is already the second time Feihe has encountered short selling, but neither time was a fierce confrontation. In recent years, the list of companies targeted by short sellers has grown longer, with stories of tug-of-war, tearing, and reversal frequently unfolding.
Among the companies, the 'highest box office' drama in the first half of this year should be the confrontation between Muddy Waters and Luckin Coffee. **On January 31, well-known short seller Muddy Waters released an 89-page anonymous report claiming that Luckin was involved in financial fraud and inflated store sales.**
**Facing the allegations, Luckin denied them at first, and its stock fell nearly 11% that day, but rebounded quickly in the following days. On the eve of its annual report, Luckin self-disclosed internal financial fraud, inflating revenue by 2.2 billion yuan.** Nasdaq directly demanded Luckin's delisting. Luckin founder Lu Zhengyao made a struggling gesture and applied for a hearing.
But on June 26, Luckin admitted defeat, withdrew its previous request for a hearing, and filed for delisting.
Hui Shan and Ausnutria, which are also dairy companies like Feihe, have also experienced short selling. In 2016, Muddy Waters released a short report on Hui Shan Dairy, believing that Hui Shan inflated profits and exaggerated capital expenditures on pastures; Chairman Yang Kai transferred a large amount of assets; and the company had financial problems. At that time, Hui Shan Dairy also denied all allegations.
But one wave after another, in March 2017, the market again reported that Hui Shan Dairy's major shareholder misappropriated 3 billion yuan from the company's accounts to invest in real estate, and the funds were not recovered, leading to an irreparable hole. Muddy Waters again accused it of falsifying sales. Subsequently, Hui Shan Dairy's stock price collapsed, with a decline of over 90% at one point, and it has not recovered to this day.
Image/Visual China
Unlike Hui Shan, Ausnutria's stock price actually rose after being shorted. On August 15, 2019, short seller Blue Orca Capital released a report questioning Ausnutria for exaggerating operating revenue, misleading Chinese consumers, hiding costs, and related-party transactions, among other financial fraud behaviors. Facing multiple allegations, Ausnutria strongly fought back. After a six-day life-and-death struggle, Ausnutria finally recovered its losses. As of the afternoon of August 20, Ausnutria's stock price reached HK$12.28 per share, up 11.43%, even exceeding the data before being shorted.
Anta Sports and New Oriental have also encountered short selling but were not seriously affected. Even more puzzling is GSX Techedu. This education institution has recently been shorted 10 times by four institutions: Muddy Waters, Citron, Grizzly, and Scorpio VC, and remains unscathed.
Facing multiple allegations of performance fraud, GSX Techedu has repeatedly responded that the differences are due to the different situation of China's online education industry. Under the sniping of many short sellers, from February to now, GSX Techedu's stock price has had two declines in the middle, but subsequently experienced several significant rises, with its market value exceeding 100 billion yuan twice.
GSX Techedu has thus become the 'tumbler doll' of the short-selling circle.
**-04-
****Which capital market has the highest cost of fraud?**
**Short sellers questioning abnormally developing companies is a common behavior in the capital market.** But looking at the companies shorted in recent years, some patterns can be summarized.
From Hui Shan, Mengniu, Ausnutria to Feihe, why have rapidly developing dairy companies been targeted by short sellers multiple times? Dong Yizhi, a lawyer at Shanghai Zhengce Law Firm, analyzed, "The shorting of dairy companies started with Hui Shan. The domestic dairy industry indeed needs to improve in internationalization and management level. Hui Shan did have fraud before, which affected the entire industry. Luckin is a similar situation."
Due to demographic factors, **consumer goods companies are most likely to produce long-term bulls in China, but at the same time, they are more likely to be caught by short sellers.** Dong Yizhi believes that consumer goods are close to the public and often **have brand effects**; secondly, such companies sometimes **have high valuations**;
Thirdly, **corporate user data is huge, and the data itself may be prone to problems**; **if there are precedents of fraud among similar companies, such as problems with users, sales, advertising operating expenses, and some mergers and acquisitions, other companies may also become targets.**
Another point worth noting is the cost of fraud in different capital markets, which is also a risk factor that listed companies must consider.
Industry insiders revealed that compared to the relatively strict regulation of the US stock market, the cost of fraud in the A-share and Hong Kong stock markets is relatively low. For example, Zhangzidao Company, famous for 'scallops running away', after the CSRC used the Beidou system to investigate its financial fraud, the maximum penalty was a fine of 600,000 yuan, and 15 responsible persons were fined between 30,000 and 300,000 yuan. This fine is as light as a feather compared to the company's fraud losses of over 100 million yuan. I wonder if this money is enough to cover the investigation cost of using Beidou.
Image/Visual China
A more famous case is Kangmei Pharmaceutical, which fraudulently inflated revenue by 30 billion yuan over three years and inflated monetary funds by 88.6 billion yuan, and also received a maximum fine of 600,000 yuan. After the penalty, its stock price even hit the daily limit up, as if mocking the regulator.
Compared to the previous two companies, Luckin, which self-disclosed fraud on the US stock market, was directly ordered to delist, and future compensation and penalties, even if not astronomical, will not be far from astronomical.
In places where regulatory policies are weak, short sellers play a certain warning role. "For the entire capital market, the actions of professional short sellers can continuously warn companies not to commit fraud and to operate in compliance, otherwise the cost will be enormous. Of course, there are also cases of failed short selling, which is normal," Dong Yizhi said.


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