Sino-Forest Corp. TRE-T is trying a new strategy to reverse the crisis of confidence in its financial statements, taking the extraordinary step of releasing bank statements and land agreements as proof that its assets are legitimate.
The move worked, at least for a time. The release of the documents, along with the announcement that the company would hold a tour of its Chinese tree plantations for analysts next month, sent the shares up more than 60 per cent in early trading. They eventually drifted lower again, but closed at $6.16, up 17.8 per cent from Friday’s close.
At that price, Sino-Forest, until recently the largest forestry company on the Toronto Stock Exchange by stock market value, is worth $1.5-billion – or nearly $3-billion less than before an obscure research analyst named Carson Block raised a sensational set of allegations that the company vastly overstates the value of the forestland it owns and that it concocts revenues.
On Monday evening, the analyst warned in a conference call that he intends to release further research on Sino-Forest’s accounting and on a subsidiary named Greenheart. “We have a lot of other material,” said Mr. Block, whose firm is called Muddy Waters Research.
The question now is whether or not the documents released by Sino-Forest hold enough weight to push back against negative market sentiment. Though the company has set up an independent committee to probe the allegations raised in the Muddy Waters report, and has released two written statements denying those allegations, its management team has so far been elusive.
The company is run out of Hong Kong, but there were no signs of life at the company’s Canadian office in Mississauga, Ont., on Monday afternoon. Tenants on either side of Sino-Forest said they did not know the employees of the company. Another tenant on the same floor said that Sino-Forest officials are almost never there: “It doesn’t really look like a real office.” Chief financial officer David Horsley, the top-ranking Canadian on the management team, did not return calls and e-mails Monday.
Some say the investing public’s growing distrust of Chinese companies could engulf Sino-Forest as well.
Michael Smedley, chief executive officer of Morgan Meighen and Associates, is one of the investors who is already making this link. Although his firm continues to hold on to its stock, despite seeing a good chunk of its $8-million stake dwindle away, Mr. Smedley admits that he has grown wary of Chinese companies with North American listings.
Sino-Forest is the second such firm to come back to haunt Morgan Meighen. Another North American-listed Chinese company it owned was battered by allegations of wrongdoing. “It is characteristic of the difficulties one often has with Chinese companies,” he said.
One of the key sets of documents that Sino-Forest has released is a package containing the original long-term purchase agreement that permits it to buy land in China’s Yunnan province. These assets were specifically questioned by Mr. Block, the writer of the Muddy Waters report, who claimed their value was overstated.
The Yunnan documents show that Sino-Forest entered into a long-term agreement in 2007 to purchase 200,000 hectares of “non-state-owned commercial standing timber.” The original Chinese agreement has been uploaded, as well as an English translated version and the company’s press release at the time.
The package also includes subsequent purchase agreements in the province, as well as forest and woodlands rights certificates. However, none of them have been translated. (English translations are expected to be available on Tuesday morning.)
Yunnan province is a crucial geographic region for Sino-Forest. As of December 31, 2010. the company owned and managed 711,000 hectares in China. Of those, Yunnan’s 186,700 hectares were the most of any province.
