A Sino-Forest Gaoyao Particle Board operation in the city of Gaoyao, China .
TSX-listed forestry giant Sino-Forest Corp. has arranged a $1.5-billion (U.S.) financing with an arm of the Chinese government, a huge war chest that will pay for expansion of its vast woodlands.
Sino-Forest, a hybrid based in Mississauga, Ont., run by executives in Hong Kong, and which manages tracts of forest in China, signed the deal with the Guangdong branch of China Development Bank Corp., a state agency set up in 1994 to encourage economic development.
The arrangement will see the CDB lend up to 10-billion yuan in project financing to Sino-Forest's subsidiary, Sino-Panel (China) Investments Ltd.
Sino-Forest's chief executive Allen Chan said the deal creates an important relationship with a financial institution that has government links. The CDB will eventually help finance both domestic and international operations, he said.
Chief financial officer David Horsley said Sino-Forest doesn't need the money right now, but the new banking arrangement will make it easier to control its cost of capital.
Sino-Forest has annual revenue of about $1.2-billion. With more than 500,000 hectares of plantation trees in China, it is the largest forest products operator in the country. There is much potential for further growth in China, where the demand for wood products - for construction, furniture and pulp mills - exceeds the current supply.
Analyst Brian Topp of Maison Placements Canada said that while Sino-Forest is unlikely to need the money from CDB in the short term, it may draw down between $200-million and $400-million in the next year to buy additional forest acreage.
The financing will be less expensive than what the company could raise elsewhere, he said, and also has the advantage of being in Chinese currency - thus avoiding any foreign exchange risk.
It also means the company is unlikely to have to go to market for equity financing for some time, he added.
Mr. Topp said Sino-Forest stock has been hit hard by the weakness in international equity markets, but he still has a 52-week target of just over $31 (Canadian) - about double the current price.
"This stock is not going to move solely on its own while the market tumbles away," he said, but over the long term it has great potential. "I don't think there is a better long-term Canadian-listed forest product stock."
Sino-Forest is participating in a fast-growing market, and this new financing shows it has access to both capital and government connections, Mr. Topp said - a formula for long-term appreciation.
Paul Quinn, an analyst at RBC Dominion Securities in Vancouver, said the large financing demonstrates to investors that financiers in China "understand Sino-Forest's business model and have confidence in it. That's very much a plus."