New questions arise over Sino-Forest timber deal

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At the heart of the controversy swirling around embattled Sino-Forest Corp. is a simple question with an elusive answer: Who does it do business with?

New concerns are emerging about a Sino-Forest deal for timber holdings in Yunnan province after a Chinese government website disclosed details regarding the identity of the seller of rights to about 7,000 hectares of forest in 2007. In a deal valued at nearly $70-million at the time, Sino-Forest purchased the timber rights from a company called Huaihua City Yuda Wood Co. Ltd.

But a document on the website of the Huaihua Municipal Bureau of Commerce describes Huaihua City Yuda Wood as "a "subsidiary of Sino-Forest." That would contradict the company's claim that it has not done such related-party sales.

Late yesterday, Sino-Forest fought back, saying the Chinese government website is wrong. Stan Neve, a spokesman for Sino-Forest, denied Huaihua City Yuda Wood is related to Sino-Forest. He declined further questions.

The dispute about the facts of the Yuda Wood deal underscores the confusing landscape that faces investors in Sino-Forest after last week's fraud allegations by Muddy Waters LLC.

The research firm is short-selling the company's stock. While parts of the Muddy Waters report have already been refuted, the allegations have nevertheless caused the stock to plummet more than 70 per cent.

The central issue is whether Sino-Forest has inflated the value of its timber holdings, which it says are worth billions. Muddy Waters claims the assets are overstated. Improper accounting for related-party transactions would be one way that a company could increase the balance-sheet value of its assets.

According to documents released by Sino-Forest this week aimed at rebutting the Muddy Waters report, Sino-Panel (Yunnan) Ltd., a subsidiary of Sino-Forest Corp., purchased the rights to about 7,000 hectares of plantation land from Huaihua City Yuda Wood Ltd. in 2007.

At the time, the deal was worth about $68-million (509-million RMB) which valued the timber assets at about $35 (Canadian) per cubic metre of trees.

Muddy Waters has published documents showing that Huaihua Yuda Wood received payments totalling 173-million RMB($25.9-million Cdn) from two Sino-Forest subsidiaries in 2007.

"According to our research from two government websites, Huaihua Yuda is a subsidiary of Sino-Forest," the Muddy Waters report alleges.

In an interview earlier this week, Sino-Forest chief financial officer David Horsley said that no related party transactions have been disclosed by Sino-Forest regarding sales of forestry assets and that the company's auditors Ernst and Young would have checked for such necessary admissions.

"If there were any related parties they would be disclosed in our documentation," Mr. Horsley said.

Muddy Waters analyst Carson Block alleges that Sino-Forest, through its "convoluted" corporate structure, has inflated its revenues and the value of its forestry assets. Sino-Forest has denied the allegations, set up a special committee of independent directors to investigate and formally asked securities regulators to probe the trading activity of Mr. Block.

At the crux of the matter is Sino-Forest's unwillingness to disclose the names or locations of its customers. Sino-Forest is in the process of planting fast-growing trees in China for harvest in five to six years, but currently generates more than 90 per cent of its revenue and profit by selling its timber holdings.

Chief executive officer Allen Chan and Mr. Horsley have said the company wants to keep its customers secret for competitive reasons as it wants to prevent rival companies from targeting the same forestry areas and customers. Mr. Horsley has said Sino-Forest's has identified its customers to its auditor, the Toronto office of Ernst and Young.

"They have full and complete access to that customer list. Whatever they would like," he said on Tuesday.

The timber purchase contract with Huaihua City Yuda Wood was made publicly available when Sino-Forest opened a so-called data room on Monday. Most documents in this online portal pertain to Sino-Forest's business dealings in China's Yunnan province. The company has addressed this area because contracts in this region were called into question by Muddy Waters' research report.

Sino-Forest does not dispute that it has done business with Huaihua City Yuda Wood. A source close to the company said Sino-Forest believes that Huaihua City Yuda Wood may have said in government documents that it is associated with Sino-Forest, in order to make the company seem "more prominent or successful."