It took just one report from a little-known short-seller to send the stock of one of Canada's biggest publicly traded forestry companies into a tailspin and its startled board of prominent directors scrambling for answers.
On Friday, the board of Toronto-listed Sino-Forest Corp., Sino-Forest Corp. which includes Hong Kong magnate Simon Murray and former Southam Inc. CEO William Ardell, publicly warned investors to view with "extreme caution" a "shock jock" short-sellers report that accused the company of grossly exaggerating the value and scale of the core timber holdings it buys and sells in China.
Behind the scenes, however, one person close to the company described the directors as "rattled" by the report. The directors held an emergency board meeting Thursday and appointed a special committee of three independent directors, including Mr. Ardell, to review the claims. Sources said the board also agreed to hire an independent accounting firm to investigate the claims.
"The directors believe that this is a company of substance. They are shocked and they intend to take a hard look at these claims," said the source.
Sino-Forest's board is under intense pressure to contain the damage. In heavy Canadian trading on Friday, the company's stock collapsed like a fallen tree, wiping out a total of $2.3-billion from the company's total stock market valuation in one day. On the Toronto Stock Exchange, Sino-Forest closed at $5.23, a 64-per-cent drop from the previous day and a 79-per-cent drop from the company's 2011 peak valuation of $6.2-billion in March. The company has lost nearly $5-billion in market value in that span.
The stunning wipeout raises awkward questions for a company that was rated a "buy" by seven Bay Street analysts, backed by respected investors such as Wall Street's John Paulson and a large cast of leading Bay Street investment banks including TD Securities and RBC. Its auditors are the global accounting firm Ernst & Young.
Sino-Forest is one of hundreds of Chinese companies that have gained entry to North American stock exchanges through a technique known as a reverse takeover of a dormant public company. While reverse takeovers have been a common practice, regulators and politicians in the United States have become concerned about the sharp influx of Chinese-led reverse takeovers. The U.S. Securities and Exchange Commission recently launched an investigation of U.S.-listed Chinese stock plays after several were accused of accounting irregularities and fraud.
Until this week, Sino-Forest was untouched by scandals that have tainted some of its smaller competitors. Last month an independent committee of directors at China Forestry revealed that the Hong Kong-listed company had falsified logging permits. Cathay Forest, which is listed on the TSX Venture Exchange, had its stock suspended in late January and the company is probing a variety of investments and contracts related to its timber assets.
Created in 1994 through a reverse takeover on the Alberta Stock Exchange, Sino-Forest's main business is buying and selling giant blocks of trees. It manages nine tree plantations in China and one in New Zealand. Sino-Forest is also involved in log trading and manufacturing of some wood products such as plywood and flooring.
"Let me say clearly that the allegations contained in this report are inaccurate and unfounded," Sino-Forest chairman and chief executive Tak Yuen (Allen) Chan said in a statement Friday.
Mr. Chan, a trained sociologist from Hong Kong who started in business with Chinese ventures in the 1980s in everything from the hotels to clothing sectors, is the architect of the sprawling Sino-Forest enterprise.
Mr. Chan's earlier businesses foundered in 1989 amid the chaos of Tiananmen Square, and he has described the stress from this time as so overwhelming that he became paralyzed. He learned to walk again after physiotherapy. Back on his feet, Mr. Chan turned his attention in 1993 to an emerging business in China that was fuelled by a construction boom. Partnering with Kai Kit Poon, a veteran government forestry engineer in China, Mr. Chan began investing in large tracts of trees.
Mr. Chan 's greatest achievement with his new venture was building a bridge to North American investors for his company. He created his company through a reverse takeover of his fledgling Hong Kong company with two dormant companies that came with a public listing. His early forays into the Canadian market allowed him to raise $5-million.
For a Hong Kong businessman whose English to this day is difficult to understand, his success in raising money from investors has been nothing short of remarkable. Despite volatile markets the company has been able to attract more than $1-billion for stock and debt investors in recent years.
One of Sino-Forest early backers was Simon Murray, the Hong Kong-based businessman famous for his stint with the French Foreign Legion and multitude of business interests which include managing billionaire Li Ka-Shing's Hutchison Whampoa and serving as chairman of Switzerland-based Glencore. In 1999, a company controlled by Mr. Murray provided Sino-Forest with $20-million in financing in return for an ownership position and a seat on the board. He has been a director ever since and been involved in several other deals with Sino-Forest, including co-owning Greenheart Resources, which owns forests in Suriname.
Sino-Forest has attracted investors with its steady revenue and profit growth.
Sino-Forest has scored consistent and steady success throughout its history, even through difficult economic periods. A decade ago, revenue rose like clockwork, $126-million in 2000 to $137-million in 2001 and $201-million in 2002. In the past several years, as the global recession ravaged many industries, and resources particularly so, Sino-Forest did not falter and growth spectacularly accelerated. Revenue of $896-million and profit of $229-million in 2008 roughly doubled to $1.9-billion of revenue and $395-million of profit in 2010. The company, which reports more than $1-billion of cash on its books, does not pay a dividend and does not plan to pay one because it wants to use the money to fund additional growth.
Mr. Chan holds 6.58 million shares of Sino-Forest and the only recorded disposal of stock in the past several years was the sale of 182,000 shares in June, 2010. Mr. Poon, nominally president of Sino-Forest but essentially retired, sold most of his 2 million shares in 2008 and currently owns about 100,000. The 2008 sale of stock was for "personal reasons," a company spokeswoman said.