Short seller "talk" haunts China Yurun, shares drop

HONG KONG (Reuters) - China Yurun Food Group Ltd (1068.HK) suffered another hit to its shares on Tuesday, as its efforts to squash concerns and rumors aimed at its business failed to convince investors.

Yurun's stock plunge and the loss of around $2 billion in market capitalization since last week shows that even market talk of being the target of a short-seller are enough to hammer shares in the current climate, given the accounting scandals and bear raids hitting Chinese companies listed abroad.

"There is still a lot of uncertainty about the company. Even though brokerages reiterated buys, people are still wary of the stock in case the rumors on Muddy Waters' report are true," said Alan Chan, director of financial services firm Taishan Capital. Several brokerages stood by Yurun on Tuesday.

The Jiangsu-based company meat processor saw its stock plunge 20 percent on Monday, hit mainly by chatter it may be the target of a report by short seller Muddy Waters. It fell by as much as 8 percent on Tuesday.

Beginning last week, the stock slumped on an expected decline in hog prices coupled with concerns over the sustainability of Chinese local government subsidies, according to analysts.

It was the Muddy Waters rumor on Monday, however, that crushed the shares, with Mirae Asset Securities publishing in a report that there have been "talks in the mainland about Muddy Waters trying to issue a report on one mainland company. The market is betting that it will be Yurun."

The company held a conference call on Monday night with investors and analysts. A slew of research reports on Tuesday reiterated support for Yurun, which led to a brief pop in the stock, followed by a quick drop.

"Early activity was dominated by retail. Some shorts were covered at the open but the 55 million shares traded in last half hour suggests fast accounts were back to shorting and some long onlys were probably bailing," said a trader shortly after the open, who declined to be identified.

Muddy Waters has been at the forefront of a group of short-sellers that have written reports alleging accounting fraud at China-based companies listed overseas. Muddy's most notable report was on Canada-based Sino Forest TRE.TO, which sparked an 80 percent plunge in its shares.

Yurun, which sells chilled and frozen meat from its slaughtering business, and processed meat products with brands like Sunshine sausage and bacon, said late on Monday that it was not aware of any reason that caused its shares to drop.

The company repeated that statement on Tuesday.

Carson Block, director of research at Muddy Waters, told Reuters on Monday that it is "not in our interest to comment" on its plans, but said a "widespread market rumor would either represent a significant failure on our part, or is false.

In 2010, Yurun posted a 54.8 percent growth in revenues of HK$21.47 billion ($354 million) and a 56.3 percent rise in net profit of HK$2.728 billion.

By the market close, the shares ended 5.9 percent lower to HK$19.38, trading over 15 times the average 30-day volume in the shares had changed hands. The Hang Seng Index .HSI was nearly flat.

"Nobody knows if this is another Sino Forest," said Jackson Wong, vice-president at Tanrich Securities. "Everybody is selling now, a lot of the big names. It's panic mode right now."

The stock drop at Yurun, with a market cap of $5 billion, appears to be impacting peers as well. On Monday, Nasdaq-listed Zhongpin Inc (HOGS.O), also a Chinese meat processing firm, saw wild swings in its shares, falling 18 percent during trade before ending 2.6 percent lower at $10.70.

(Additional reporting by Vikram Subhedar and Clement Tan; Editing by Michael Flaherty)