9/18/2010 Lenders Want Their Money From Chi…

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ASIA BUSINESS MAY 5, 2010

Lenders Want Their Money From Chinese Milk

Supplier
Bondholders Stung By Once-Hot Firm
By JASON ZWEIG And C AR OL YN C U I

U.S. and European bondholders are trying to recoup nearly $170 million owed to them by China
Milk Products Group Ltd., the latest in a wave of Chinese companies that have defaulted on their
debt since the beginning of 2009.

Among the once-hot companies whose bonds

WSJ Professional
have fallen substantially in value in the past 16
Pitfalls for U.S.-Listed Chinese Firms
months: Celestial NutriFoods, China Sun Bio-
Chem T echnology, Delong Holdings, Fu Ji
Foods & Catering Services, Sino-Environment Technology and Sunshine Holdings.

Investors have jumped headlong into the stocks and bonds of Chinese companies in recent
years, often willing to pay high prices in order to get access to China's high-growth economy.
Now many of those same investors are bracing for a wave of debt problems—especially from
companies that sold stock and bonds during the boom years of 2006 and 2007. All told, roughly
$1.3 billion in debt has been affected, according to a Wall Street Journal estimate.

China Milk distributes milk, develops cow embryos and sells bull semen across China. Its chief
executive, Liu Hailong, has been unreachable for many days over the past few weeks, say
employees and outside investors. One creditor said an informal group of large bondholders has
hired a private investigator to gather more information about the company and Mr. Liu's
whereabouts. China Milk's directors and officers didn't respond to requests for comment.

Among China Milk's biggest creditors is BlackRock Inc., the giant U.S. asset manager; several of
its mutual funds hold an estimated $56 million. A representative for BlackRock declined to
comment.

China Milk shares, which trade in Singapore, have been halted since February. Although its
operations are based in the northeastern city of Daqing, China Milk is legally headquartered in
the Cayman Islands.

Investors are thus in a regulatory black hole: Securities authorities in China say China Milk isn't
Chinese and that they have no jurisdiction over its stock or bonds. "We are only responsible for
protecting domestic investors," said an official in the international-cooperation department of
the China Securities Regulatory Commission. As is often the case among midlevel officials in
China, he declined to give his name.

The Singapore Exchange, or SGX, has jurisdiction over China Milk's securities, but lacks
authority over the company's executives, who remain in China. SGX has publicly rebuked China
Milk for failing to respond to the exchange's requests for information. Richard T eng, head of
issuer regulation at SGX, says the exchange has "caused the material development[s] to be
disclosed publicly."

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Like China Milk, a number of Chinese companies accessed international capital markets in
recent years. But several of those firms have since run into trouble. They include Celestial
NutriFoods, a maker of soy products, which defaulted on $155 million in convertible bonds last
June and is "engaging the bondholders to seek a mutually satisfactory resolution," executive
chairman Ming Dequan said April 30.

Fu Ji Foods & Catering Services, whose shares were formerly

listed in Hong Kong, has been in liquidation since late 2009
after failing to pay off $368 million in convertible bonds.

China Milk was founded in 2001 by Mr. Liu's father, an

entrepreneur from rural Wuchang, who remains chairman. It
launched its initial public offering in 2006 in Singapore and
its bond offering soon after. Profit nearly doubled from fiscal
2005 to 2007, from $32 million to $56 million.

In 2008, the company suffered after a countrywide scandal

implicated other milk producers for contaminating products
with melamine, a toxic chemical.

Chinese consumers cut back on dairy products, even though

government inspectors found China Milk's products were
untainted.

Last Oct. 30, China Milk's quarterly earnings report showed

revenue fell 75% from a year earlier. Operating profit
dropped 81%. The company warned that rising feed costs
and "more stringent government controls" on milk would
mean "lower revenue and smaller margins ahead."

On Jan. 5, China Milk announced that virtually all of its convertible bonds had been put forward
by investors for early redemption. But the company didn't buy back the bonds, instead stating it
was "still currently awaiting clearance from the State Administration of Foreign Exchange … for
the remittance." That agency, known as SAFE, approves transfers of foreign currency out of
China.

On Feb. 22, after inquiries from the Singapore exchange, China Milk stated that it had never
actually "made any formal application to the SAFE for the approval of remittance of funds out of
[China]"—but promised to do so right away.

An official at the Daqing bureau of SAFE, who declined to give his name, said a China Milk
employee came to SAFE's office in February asking how the company should handle the
transfer. "Since then, they haven't come back to us," he said.

On April 22, China Milk's auditor, Grant Thornton, released an audit of the company's bank
accounts.

Between last Oct. 30 and Dec. 31, China Milk's cash balance dropped by more than $220 million;
as of this Feb. 28, it stood at $56 million, Grant Thornton said.

China Milk's board has ordered a new, independent audit by KPMG, according to Joo Khin Ng,
an employee of Stamford Law Corp. of Singapore, who is handling China Milk's investor
relations.

Meanwhile, the chairman was last believed to be in Hainan province, some 2,500 miles south of
China Milk's headquarters, according to his assistant, a woman who identified herself only as
"Ms. Ma."

She said the company's real-estate subsidiary, Daqing Qinglong Real Estate Development, may
buy an island there and that the project would keep the chairman "busy there for a while."

The chairman's son, Liu Hailong, is China Milk's CEO. According to the younger Mr. Liu's
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assistant, the CEO recently left Daqing.

He didn't tell her where he was going, and she says he has turned off his cellphone. "I am also
looking for him," she said.

Write to Jason Zweig at intelligentinvestor@wsj.com and Carolyn Cui at carolyn.cui@wsj.com

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