A China Yurun Food Group Ltd's booth at an expo in Beijing. It's shares declined amid speculation that Muddy Waters LLC may issue a negative report on the food company. [Photo / Provided to China Daily]

C hina Yurun drops amid rumors of damning report by research firm

Shanghai - China Yurun Food Group Ltd dropped in Hong Kong trading, extending the company stock's record 20 percent plunge on Monday.

That came as short selling surged amid speculation that the research firm Muddy Waters LLC will issue a negative report on the pork producer.

Zhu Yicai, Yurun chairman, attributed the slump on Monday to "hedge funds and market rumors" and wasn't aware that any organization plans to issue a report on Yurun, according to Titus Wu, an analyst at the research firm DBS Vickers Hong Kong Ltd., who was on a 30-minute conference call with the company.

The briefing wasn't open to journalists and Yurun hasn't returned at least five calls and e-mailed requests for comment.

"We take pains to keep our research activities confidential, and a widespread market rumor would either represent a significant failure on our part or is false," Carson Block, a Muddy Waters founder, said in an e-mail.

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Yurun fell as much as 8.7 percent, declining for a fourth day in a row, after short-selling affected 21.8 million of its shares on Monday, four times as many as were affected on June 21, according to Bloomberg data.

The stock prices of various Chinese companies, including Sino-Forest Corp, and Orient Paper Inc, have declined after the companies were accused of accounting irregularities by the Hong Kong-based Muddy Waters.

Orient Paper this month encouraged Chinese companies to be more transparent. It has said a four-month investigation by the firms Loeb & Loeb LLP, Deloitte & Touche Financial Advisory Services and TransAsia Layers found no evidence to support Muddy Waters' allegations.

"The concerns are still based on rumors - a lot has not even been verified," Renee Tai, a Hong Kong-based analyst for Samsung Securities Co, who recommends buying Yurun's stock, said in a phone interview on Wednesday.

"From the fundamental point of view, everything's chugging along nicely. We're not seeing any sort of surprises. Even the margin pressures are within expectations."

Zhu, Yurun chairman, said he plans to buy back shares in the company, which is based in Nanjing, Jiangsu province, according to Tai, Nicholas Wang, an analyst with Daiwa Institute of Research Ltd, and notes to clients from Wu at DBS Vickers and CCB International Securities Ltd.

Wu downgraded Yurun to "hold" from "buy" in a note to clients on Tuesday, citing bad publicity.

"We maintain our forecast of 35 percent core earnings growth this year, excluding government grants and negative goodwill," Wu said. Still, he said "the chairman was still unable to clarify and explain questions about the breakdown of government grants and the size of the pig farming belonging to Yurun Group".

Sino-Forest Corp, a Canada-listed Chinese company, has dropped more than 80 percent in Toronto trading since June 2, after Muddy Waters said the company overstated its timber holdings. Sino-Forest has denied the allegation.

The price of Yurun shares dropped on Monday by the most since the company first sold shares in October 2005. The decline was the steepest on the MSCI Asia Pacific Index.

"There's a negative view on such kind of private entrepreneurs, especially after recent scandals at Chinese companies listed in the US that made the reputation of Chinese private companies not as good as before," said Wang, a Hong Kong-based analyst at Daiwa, who recommends buying the stock.

Yurun said it has worked with reputable international firms since going public, and that Goldman Sachs Group Inc sponsored its 2005 initial offering and KPMG audited its accounts, analysts who attended the call on Monday, including those from DBS Vickers, CCB, Kim Eng Securities Ltd and Citigroup Inc, said in notes to clients.

Yurun's gross profit margin underwent a "slight decrease" in the first five months of the year, according to a filing to Hong Kong's stock exchange on Monday.

The company's sales meanwhile rose "significantly" in the period up to May 31 compared with 2010 largely because of higher hog prices and a greater slaughtering volume, it said.

The price of marbled pork in China rose as much as 4.3 percent to 28.20 yuan ($4.35) a kilogram in the 10 days from June 11 to June 20 compared with the previous 10 days, the National Bureau of Statistics said on Friday. Prices for pork thigh rose 4.1 percent to 29.05 yuan a kilogram.

Bloomberg News