Carson Block, the now notorious author of the Muddy Waters report that aimed to take down Sino-Forest Corp. TRE-T, held a conference call on Monday night to support his research. On Tuesday, Dundee Securities analyst Richard Kelertas, who vehemently disagrees with Mr. Block’s allegations, decided it was fitting to do just the same.
Mr. Kelertas didn’t mince his words. From the get-go his goal was to explain “why Muddy Waters’ research is a pile of crap” and he went about his attack by addressing specific issues that Mr. Block has raised.
The two key topics were Sino-Forest’s "authorized intermediaries" (AIs), and the documents that Mr. Carson allegedly uncovered from China’s State Administration for Industry and Commerce (SAIC).
Regarding the AIs, Mr. Block has said that they are used to concoct revenues and that they make it hard to track cash flows. In his rebuttal, Mr. Kelertas noted that AIs are common for companies that operate in China, and that Siemens has more than 2,000 of them. That still doesn’t answer why four of the AIs haven’t been named, but this wasn’t his point. Mr. Kelertas wants investors to know that AIs are nothing to be scared about and that they aren’t something the company created to conceal any wrongdoing.
As for the SAIC documents, Mr. Block refers to the ones he obtained in an attempt to prove that the company has lost money in certain areas and that many of its assets are overvalued. However, Mr. Kelertas noted that each of Sino-Forest’s subsidiaries must file a different SAIC, and that they must all be obtained in order paint a clear picture of the company because each report tells a different piece of the total story.
Mr. Block has also mentioned that the SAIC documents don’t match Securities and Exchange Commission documents. That happens, Mr. Kelertas said, because the SAIC files don’t aggregate all of the different holding companies like the SEC ones do.
Mr. Kelertas was resolute in his support. “We’ve spoken to the company on about 20 occasions since this has broken,” he said.
And unlike Mr. Block, who only recently started looking at Sino-Forest, Mr. Kelertas said he has covered the name since 2004 and has known the company since 2000. Moreover, he noted that since David Horsley left the board of directors to become chief financial officer in 2003, Sino-Forest’s level of corporate governance has been very high.
“All indications are that there are no fraudulent activities, no overstatements. We believe in the company. We trust the company after they have come through with various disclosures,” Mr. Kelertas said.
If Sino-Forest has done nothing wrong, why hasn’t its stock rebounded from its devastating drop? Mr. Kelertas has a theory. For starters, before the report was released, markets were already nervous because QE2 is winding down and there are fears of a Chinese economic slowdown. But more important, there was a growing short position in Sino-Forest’s stock so investors were primed to jump at anything overly negative. Plus, allegations of wrongdoing against China Forest Holdings Co. Ltd., another Chinese forest plantation operator, broke earlier this year, so investors had that weighing on their minds.
But even against that backdrop, Mr. Kelertas reiterated that Muddy Waters alleged Orient Paper was engaged in a massive fraud back in 2010, and was proven wrong. Independent auditors at Deloitte went in, inspected the company, and Orient Paper came out clean.
Its stock, however, has never recovered.
