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Even before the folks at Muddy Waters Research showed up on the scene, there was a healthy short position in Sino-Forest Corp. and a debate about whether the company was worth what the market was paying.

The short case revolved around issues such as the company's ability to repatriate profits from Chinese investors to Canadian ones and its ability to execute on its plans to replant its forests with fast-growing, high-yielding trees.

Short positions in Sino-Forest averaged around 20 million shares this year, about 8.4 per cent of the company's float, according to Toronto Stock Exchange reports.

The company's confusing corporate structure is the kind of thing that draws a short's attention. But there were other things that could tempt someone looking for a company to bet against.

One is its negative free cash flows. The company was consistently using more cash on investments than it was getting from operations. In 2010, $210-million more went out the door for investments in such things as new plantations than came in from cash flows from operations. In 2009, the gap was about $100-million. Financing and cash on hand were required to make up the difference.

There's another question: If at some point the company does start to generate surplus cash, can it get that money easily out of China back to investors outside the country? After all, China has strict controls on movement of foreign currency.

Another target for skepticism is the company's planting strategy. The company has been planning on switching from a model of mostly buying standing timber to planting more of its own.

Switching to planting trees from buying standing timber makes sense. Seedlings cost a lot less to acquire than standing trees, so the company's cash flow should improve as planted timber is harvested.

But the switch also brings execution risk, as it's a new way of doing business.

As of year-end 2010, Sino-Forest said it planned to plant as much as 100,000 hectares this year with "scientifically advanced seedlings" as part of a larger plan to plant 200,000 hectares by 2012. The company also expects the wood yield on the trees it's planting to rise by 56 per cent by 2012, thanks to "unique expertise in applying specialized science to growing eucalyptus trees."

If Sino-Forest has trouble with either the planting schedule or yields from the fast-growing eucalyptus, some of the value that investors had been seeing would be imperilled.

All those arguments are moot now. Whoever was short Sino-Forest, no matter what the reason, is in the money now.

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