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Photos supplied by Sino-Forest. Photo of one of their Gaoyao Particle Board operation in the city of Gaoyao, province is Guangdong and country is China . (Handout)
Photos supplied by Sino-Forest. Photo of one of their Gaoyao Particle Board operation in the city of Gaoyao, province is Guangdong and country is China . (Handout)

Sino-Forest 'angry, stunned and frustrated' at allegations Add to ...

Top executives of Sino-Forest Corp. , the besieged TSX-listed Chinese forestry firm that has lost more than $2-billion in market value in recent days, say they are "angry, stunned and frustrated" by the allegations against the company.

In an exclusive interview with The Globe and Mail marking their first public comments on the intensifying controversy, chief executive officer Allen Chan and chief financial officer David Horsley called accusations leveled by a U.S. short-seller and his research firm "false, unjustified and unfair."

Mr. Chan and Mr. Horsley however, refused to identify customers who purchase the company's trees in China citing "competitive" reasons. The murky identity of customers has been at the heart of allegations against the company as sales to such entities are currently responsible for more than 90 per cent of the company's revenue and profit.

"We have to be very careful [to not disclose our customers] otherwise our advantage would be taken away from us," Mr. Chan, Sino-Forest's co-founder, chairman and chief executive officer, said in a telephone interview from Hong Kong.

Muddy Waters Research, a firm headed by U.S.-born Carson Block, has led a devastating attack on Sino-Forest during the past week that has caused the stock to plunge more than 60 per cent and wiped out billions of dollars in shareholder value. Mr. Block has levelled fraud allegations against several Chinese companies listed on North American stock markets during the past year, casting suspicion around the growing list of companies from China tapping overseas markets for capital.

Sino-Forest, however, is a much larger and well-established player compared to Mr. Block's previous targets. It was established in 1994 and recently reached a market value of about $6-billion as investors bought in to the company as a way to play the Chinese economy's surging demand for wood.

It also boasts prominent executives and shareholders including John Paulson - perhaps the world's most famous hedge fund manager for his prescient calls on the U.S. market meltdown in 2008 and the soaring price of gold. Mr. Paulson is Sino-Forest's largest shareholder, owning 14 per cent of the company. The Sino-Forest stake accounts for about 2 per cent of Mr. Paulson's flagship investment fund.

Mr. Horsley, Sino-Forest's CFO, said management has been in frequent communication with Mr. Paulson, who continues to hold his share position.

"We are certainly in conversation with him and others to talk about what is going on and things that we need to be doing and the alternatives that the company could undertake to respond to some of these allegations. It has been friendly, supportive and suggestive discussions," Mr. Horsley said.

Sino-Forest does not believe it is the subject of any regulatory investigations, Mr. Horsley added. The company has set up a special committee of independent directors to investigate the allegations. It is also preparing to file legal action against Mr. Block and Muddy Waters and may officially request stock market regulators investigate trading by Mr. Block and any associates who knew of his coming report.

The Muddy Waters research report alleges that Sino-Forest has inflated the value of its timber holdings, has provided "fraudulent data" to an outside company that evaluates Sino-Forest's assets and has used false or related intermediary companies to buy its plantation holdings.

Mr. Chan and Mr. Horsley denied all of these allegations. They said Mr. Block has "misunderstood" Sino-Forest's current business, which involves buying plantations of trees in China, holding them for two or three years while they increase in value, and then selling them for a profit. Sino-Forest's margin on such transactions has been between 40 per cent and 50 per cent.

Mr. Block, for example, alleged that Sino-Forest would have needed thousands of trucks to harvest and transport all the logs from a recent sale of holdings in the province of Yunnan.

"If he'd only read in our [regulatory filings] we clearly stated that we never said we sold logs … it was standing timber and the trees are still standing and are not part of a [government-imposed limit on harvesting]quota," Mr. Horsley said.

"As time unfolds and the special committee does its work they'll knock off allegation by allegation," he added.

Citing Sino-Forest's "convoluted" corporate structure, which includes more than 40 subsidiaries in China and 16 in the British Virgin Islands, Mr. Block has implied that the company uses these entities to redistribute cash raised by the company. Muddy Waters and Mr. Block also allege that many of Sino-Forest's forestry sales are made to related parties.

Mr. Chan said is "common" for a company in China to set up separate subsidiaries wherever it operates in order to pay local taxes and to gain access to local subsidies and funding for research and development.

As for its undisclosed list of customers, Mr. Horsley said Sino-Forest has not sold timber holdings to related parties. He said the company's auditors Ernst & Young have been given full access to the names and locations of its customers.

"We don't like to publish those customer's names because it is like putting a flag up. Just like we don't disclose every area where we plant trees. It's like putting up a little flag and saying 'everybody come here.' If we disclose our customers we are saying 'everybody come here and sell to our customers.' That is important information for someone to replicate what we are doing," Mr. Horsley said.



Moody's Investors Service put Sino-Forest Corp. under review Tuesday for a possible downgrade as the Chinese timberland firm continued to fight allegations it exaggerated sales and assets.

Sino-Forest has refuted the allegations, but Moody's raised concerns the company's business may be affected even if the accusations are proven false.

"Moody's notes that Sino-Forest has been growing aggressively, and needs ongoing access to the equity and debt markets to continue such growth," the debt rating agency said in a statement.

"There is a risk that the current allegations will damage its ability to do so, or increase the cost of doing so."

Moody's, which currently had a rating of Ba2 on the company, said $1.9-billion in Sino-Forest debt is affected by the review.

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