Meanwhile In China, Cow-Collateralized Stock Buybacks
By Tyler Durden
Over the past few years, we have written many strange stories about China’s often-ridiculous, perpetually-bubbly, always on the precipice financial system. The story about China’s literal “cash cows”, however, is by far the strangest.
As everyone knows by now, the primary reason the global equity market, taking its cues from the US, is where it is now is due to a relentless stream of debt-funded stock buybacks. Earlier this year Bloomberg stumbled on the same thing we have written since 2013, namely that “there is only one buyer keeping the bull market alive.”
And, as it turns out, even China figured it out. There is only one problem… well two:
- The first is that to buyback your own stock, a company needs to generate a substantial amount of cash flow which can then be used to directly buyback your own shares (making management/shareholders who use corporate cash flows to make themselves wealthier in the process). Unfortunately most Chinese companies, many of which are stunning case studies in fraud, have a glaring problem when it comes to actual profitability and generating cash flows.
- The second problem is that unlike in the US, following the recent (and now largely burst) corporate bond bubble, issuing bonds to fund buybacks – and in general lending to risky companies – appears to now be rather frowned upon in China.
So in the absence of these two necessary conditions, how is a Chinese company to boost its stock price by buying back its stock? The answer, as it turns out is cows, and specifically a cow sale-leaseback transaction.
That’s precisely what China Huishan Dairy Holdings, which operates the largest number of dairy farms in the country, has done.
According to Bloomberg, the company is selling about a quarter of its herd, about 50,000 animals, to Guangdong Yuexin Finance Lease Co. for 1 billion yuan ($152 million) and then renting them back. The reason: to obtain urgently needed cash (let some other sucker CEO worry about paying the coupon on the lease), so it can repurchase glorious amounts of its stock.
And yes, cows were used as collateral. “It’s not very common to use cows as collateral,” said Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. “The value of a cow would fluctuate depending on milk prices and other factors, so it’s a risky asset for lenders. It would be hard to do forced selling – there’s no liquid market for a large number of cows.“
Puns intended.
To be sure, there is a politically correct spin on the situation, and that’s what the Bloomberg story focuses on. It writes that “with an estimated $1.3 trillion of risky loans in the country, Chinese banks are becoming more cautious about lending, forcing some companies to look for new ways to borrow.” As a result finance leasing has been growing in popularity, especially for purchases of equipment. “In Huishan Dairy’s case, the story is an increasingly common one in China of rising debts, slumping commodity prices and …read more
Source: Meanwhile In China, Cow-Collateralized Stock Buybacks
