Huadi: Big News Coming, or Just Another China Meme Stock?

Key Takeaways:

• Huadi International’s shares soared 90% on Friday despite a lack of news from the company, which hasn’t released any financial results since February
• The company could sell up to $300 million in new shares, according to a June stock exchange filing, equal to nearly half of its market value after the Friday rally

By Doug Young

We begin the new week with steel pipe maker Huadi International Group Co. Ltd. HUDI, whose stock wowed Wall Street last Friday by jumping nearly 90% in a single day, adding more than $300 million in market value to what otherwise looks like a very ho-hum company.

A few things could be happening here, including wildly speculative trading like the kind that recently made meme stocks of a handful of Chinese companies like AMTD Digital HKD and GigaCloud GCT. Then there’s another possibility that something could be going on behind the scenes at this company.

The bottom line is that Huadi is the latest Chinese company of mystery in New York, defying bearish sentiment that has pushed most U.S.-listed Chinese stocks to all-time lows over the past year. Exemplifying that bigger trend is former e-commerce highflyer Alibaba BABA, once one of the world’s 10 largest companies by market cap, whose stock has plunged 60% over the last year and is fast approaching the price of its blockbuster 2014 IPO.

Huadi’s stock has done just the opposite. The company made a low-profile IPO in January 2021, raising $25 million by selling American depositary shares (ADSs) for $8 apiece. The stock didn’t go anywhere for the first nine months after its debut, which isn’t too surprising given its presence in the relatively low-growth construction industry.

But then something happened about a year ago, and the stock suddenly tripled in a very short period. We previously said that jump might be temporary, since there was no real reason for the big gains. Apparently, we were wrong. At its Friday close of nearly $59, the stock now trades at more than seven times its IPO price, giving the company a market value of $780 million and a lofty price-to-earnings (P/E) ratio of 210.

A look at the company’s latest news releases doesn’t yield anything too significant. The most recent was a very boilerplate announcement of results of its regular annual meeting last month, which included the election of directors and confirmation of its auditor. The company hasn’t announced any financial results since February, when it released its latest annual report for its fiscal year through September 2021.

In a development that some might consider worrisome, the company has yet to release any results for the first half of its latest fiscal year – compared with last year when it issued such a release in August. That could point to difficulties in its home in China, where the real estate market is undergoing its most painful correction since its inception in the mid-1990s. But such worries should bring the stock down, not send it soaring.

The one interesting inkling that something may be happening behind the scenes comes from a June stock exchange filing, where the company announced it could raise up to $300 million by issuing new shares. This kind “shelf registration” filing is really just an indicator of what the company is thinking rather than a specific plan.

Where’s the beef?

The big question is, what gave the company the confidence to tell investors it could make such a major new share issue roughly equal to its market cap at the time of the June announcement? After all, such an issue would be highly dilutive to existing shareholders, and there’s no indication of why a company whose value was already quite inflated should be inflated even more.

The only potential answer we could see might lie in future plans to “inject” more assets into the company. Such injections are relatively uncommon in the west, but used to be all the rage in China, especially among state-owned companies. Such deals would typically see a company make an IPO using a small number of assets that were spun off into a separate unit. Then the unlisted parent would gradually inject more of its assets into the listed company, often by “selling” them to the listed company at a big discount to their real value.

A look at Huadi’s financials shows it’s a unit of one such parent, a company called Yotrio Group Co. Ltd.(002489.SZ), which is listed in Shenzhen. Yotrio is a maker of lawn furniture, and looks slightly more interesting than Huadi due to its global reach. Its actual financials aren’t anything to get too excited about, with its latest report showing its revenue rose 17% in the first half of this year to nearly 5 billion yuan ($690 million), while its profit fell 39% to 279 million yuan.

Yotrio’s market value is roughly double Huadi’s, currently worth about 8.6 billion yuan, or about $1.2 billion. So, theoretically, an injection of some of Yotrio’s other assets into Huadi could justify the addition of $300 million in market value, and perhaps the $300 million in new shares would go directly to Yotrio in exchange for any such injection.

Then there’s the possibility that Huadi’s huge share jump was just speculative buying, similar to what happened last year to GameStop GME and AMC Entertainment AMC. A similar wave of buying over the summer for a new group of China meme stocks saw newly New York-listed Chinese companies like Jianzhi Education JZ and Magic Empire Global MEGL briefly soar many-fold, before mostly crashing back to earth.

The poster child for that wave of China meme stocks was AMTD Digital, a financial services provider whose stock shot up from its $7.80 IPO price in July to as high as $2,555. The stock has since given back most of those gains, last closing at about $28, and most of the other China meme stocks now trade below their IPO prices.

Huadi somewhat stands apart from the meme stocks in the longer length of its rally, which predates all the others and has now lasted more than a year. If an asset injection is really coming, the company could theoretically maintain some, though not necessarily all, of the recent gains. We’ll have to wait for the company’s overdue mid-year report, and possibly any specific fund-raising plans, to get a clearer picture of what might be going on.