A labourer checks the quality of timber at a storage site in Yuanjiang, central China's Hunan province.CHINA DAILY
Sino-Forest: A cut above the competition?
Sino-Forest Corp. is unique among Canadian forest companies. Based in Mississauga run by executives in Hong Kong who manage forest assets in China, Sino-Forest is positioned to ride the resurgence of economic activity in China at a time when the rest of the Canadian forest industry is in crisis because of the depressed North American market.
It also has a substantial head start over other Canadian firms in a range of industries hoping to do business in China, where Federal Finance Minister Jim Flaherty is leading a trade mission this week.
Formed in 1994, Sino-Forest is now the largest forest operator in China. The company owns and manages about 434,000 hectares of plantation trees in China and derives most of its revenue from there, selling wood products needed for infrastructure investment and the rebounding housing market.
What? A Canadian forest company that's actually growing?
Sino-Forest surpassed analysts' expectations with second-quarter profit of $45-million (U.S.), or 23 cents a share, compared with $43.4-million, or 24 cents, a year earlier.
Revenue increased by 21.3 per cent to $224.4-million, the company said in its earnings report Monday.
According to Reuters Estimates, seven analysts on average expected earnings of 22 cents a share, excluding items, while the consensus revenue view of two analysts was for revenue of $212.3-million.
What the CEO said
"The rebound we saw in China's economy and the forest products industry in the first quarter continued in the second quarter of 2009. China's gross domestic product grew by about 7 per cent in the first half of this year because of the central government's stimulus spending on infrastructure and housing," chief executive officer Allen Chan said during a conference call with analysts.
"We are pleased to report record strong growth in revenue as we have witnessed an increase in fibre demand, which was attributable to China's economic stimulus spending and rebuilding work in Sichuan province post-earthquake, while fibre prices remained steady during the quarter. We anticipate log prices will return to 2008 levels by the end of this year," he said.
The China context
Goldman Sachs has raised its forecast for Asian economic growth this year and next, projecting that China's gross domestic product will grow by 9.4 per cent this year and 11.9 per cent in 2010.
Mr. Chan said the effects of the government's $585-billion stimulus spending package and heightened lending activity by the country's mostly state-owned banks have spurred activity and restored confidence to Chinese consumers, who have been sitting on their money.
"When the Chinese people … see that the government is committed to such an extent, they will be confident enough to use their money to expand their businesses," Mr. Chan said. Real estate sales were also up by more than 31 per cent in the first six months of this year, compared with the first half of 2008 - spurring demand for the lumber needed for houses and furniture, he said.
What the analysts and fund managers say
Chinese stimulus is clearly working, RBC Dominion Securities analyst Paul Quinn said in a research report. "The government has committed to build 5.2 million low-rent homes over the next three years and subsidize homes for 7.5 million poor urban families by 2011. Demand for wood panels for concrete forms, as well as floors and other finishing for new housing is expected to keep demand for Sino's timber robust."
Eric Yan, a portfolio manager with Mavrix Fund Management Inc., said in an interview that Sino-Forest has "a very good story.
"They are the largest plantation company in China, so they are definitely a market leader in that sense. And also, their corporate governance is second to none in China, in that industry."
There is no other company like it, Richard Kelertas of Dundee Securities said in an interview.
"Sino-Forest continues to be the best positioned timber plantation manager/owner to take advantage of the expanding wood fibre shortage in China. The Chinese government can and will use all its resources in order to maintain economic growth … and the recovery appears to be well under way," Mr. Kelertas said in a research note.
China can only supply about 50 per cent of its wood fibre needs (for use in home construction and furniture), "and the government is attempting to encourage … companies, such as Sino-Forest, to increase domestic production," he wrote. "The result has been strong government support for the forestry sector."
One nagging concern: Will the China bubble burst?
"There is some concern that easy credit has gone too far, fuelling a boom in urban property markets and driving the Chinese stock market up 84 per cent to date," Mr. Quinn writes. "The government has shown signs of reining in private borrowing. It has introduced tighter controls on large bank loans, increased credit oversight and has upped bond purchase requirements for large banks in an effort to soak up excess liquidity."
What's the stock done?
Sino-Forest's stock was trading at $16.21 (Canadian) after the earnings release Monday - marking an increase of more than 64 per cent year to date. The company has a market capitalization of a little over $3-billion.
Mr. Yan of Mavrix noted that the stock advanced by more than 10 per cent last week alone.
"We actually participated in the last private placement a couple of months ago. The shares at that time were a little over $11 … so they're not too bad, a 30 to 40 per cent gain already."
It is "just a function of time" before more investors cotton on the Sino-Forest's long-term potential, Mr. Yan said.
Dundee's Mr. Kelertas said the stock will likely pause after such a substantial run-up over the past several months, but will eventually regain momentum.
"We are maintaining our buy (sector top pick) rating on Sino-Forest and our 12-month target of $20 a share," Mr. Kelertas wrote.
The outlook:
"We are optimistic about the outlook of China's forestry sector and demand for wood fibre due to the positive effects of China's stimulus plan which called for further infrastructure development, rebuilding of Sichuan and building of low-income housing for rural areas," the company said in reporting its financial results.
"We continue to focus on acquiring standing timber and improving our operating practices, while building a plantation platform of over one million hectares for replanting. As of June 30, 2009, we had 434,000 hectares of trees under management and over 900,000 hectares of trees available to be acquired under our five long-term master agreements. We believe that we are well positioned to benefit from the Central Government's goal of doubling fast-growing, high-yield plantations to 13 million hectares by 2015."