Monday, 6 June 2011

Fictitious Forests

Remember Enron? How they had a whole bunch of intermediary companies to take on their debt? Or how they made transactions with them? Or the fact that some were named after Star Wars characters? (Ok, that was actually pretty funny).

Well, we may have another Enron, except these guys don't trade energy. They trade forests.

TRE or Sino Forest Corp has fallen from $22 a share to recently closing just above $6 a share in a matter of days. This is due to the work of Muddy Waters, a Honk Kong firm devoted to exposing Chinese fraudulent companies, but shorting them before doing so. May as well profit from it. The report from Muddy Water's is 39 pages, the appendices are much longer. I think the most interesting part is the role of Ernst and Young, Sino's auditor. Currently, five former EY members sit on the SINO board of directors.

Basically, the report states that Sino uses financing it receives to buy forests and sell them to subsidiary companies that are closely related to them, not quite arm's length - but close. Documents and financial statements show part of the paper trail. An example of this is that Zhangzhou Lu Sheng Forestry Development Company Limited was incorporated nine months before Sino entered into a billion dollar contract with it. The startup capital for Zhangzhou Lu Sheng Forestry Development Company Limited was $78,000. With that type of capital, it is unlikely that a company that size could deal with a billion dollar contract. Speaking of the contract, it was only seven pages long. One would think that a contract dictating how one billion dollars would be allocated would be filled with pages of legal jargon.

Adding to this,  Jiangxi Zhonggan Industrial Development Company Lt was incorporated five months before Sino entered into a 700 million dollar address.  Zhangzhou Lu Sheng at least had a small office, the registered address for Jiangxi Zhonggan was an empty field. At least shows the picture from the Muddy report. Quite a few transactions occurred between Sino and Jiangxi Zhonggan, but none of them were forestry related.

These are just two of the subsidiaries. Another interesting part of the report states the laws in China for foreign capital. It must be processed by the Commerce Ministry before use and this is recorded. Since 1994, Sino has brought in $1.214 billion to be used in the company (and much lower than the $3 billion it has actually raised). The operating cash flow since this time is much lower. However, this measurement could be construed as Sino's main business is buying and selling forests. This is stated by the Poyry report:

Unlike most forest owners and managers, Sino-Forest actively trades in forests.  Each year the company both sells and buys forests, and accordingly the composition of the forest estate changes much more than for a business that is simply managing and harvesting a more static resource.

Jakko Poyr has been writing valuation reports on Sino, which Muddy Water's reports that these reports are based on falsified data.

The link to the report is right here:

Looking at the financials, this company has grown disproportionately to any other public company. Meaning, the economic storm never affected them whatsoever. Growth just kept on rolling on. Operating profit increased from 204m in 2006, to 1.4 billion in 2010. This increase was from 204m in 2006, to 241m in 2007, to 788m in 2008 (the year the crash occurred), to 1 billion in 2009 and finally 1.4b in 2010. Looking at this alone, something seems suspicious. But growth is not criminal.

It is interesting to see there has been no cash flow from sale of property/plant/equipment in the cash flow section, yet extreme purchases in long term investments. The report from Muddy's clearly states the short term period that land remains in TRE's hands, so shouldn't this be in short term?

This is just my first thoughts from glancing at the financials. I would have to go through the SEDAR, calculate ratios for a real analysis, something that I would have done had I put money into this stock. However, I am just writing about this as this could be one of the largest scandals in a long time.

However, their is a defense. Mr. Quinn, an RBC analyst says:

“Over the last five years, I have visited Sino's Chinese forest operations on four separate occasions for about a week per visit,” Mr. Quinn noted. “I have seen Sino purchased trees and planted trees, manufacturing operations, other operations that purchase Sino's logs, Sino's nursery operations and tree-improvement project. I have been in numerous meetings with government forestry bureau representatives and Sino's operational staff.”

This was in reaction to BMO Nesbitt Burns' nothing that the company did not provide proof of tree ownership at its last meeting.

Sino has countered by providing an open database of ownership documents and bank documents proving the validity of the company. English translations should appear tomorrow (June 7) morning. The key information in the database is the package containing purchase agreements to buy land in the Yunnan province of China, specifically questioned by the Muddy report.

So is this a buy? Or sell?

Depends whom you ask. Personally, I'll watch - let the situation unfold. I may day-trade it a bit - but that's it. Morning gap downs are not fun to wake up to.

EDIT: Rosen Law Firm has launched an investigation on behalf of investors (

Any information contact:

If you purchased Sino-Forest stock between March 31, 2009 and January 31, 2011, please visit the website at for more information. You may also contact Phillip Kim, Esq. or Jonathan Horne, Esq. of The Rosen Law Firm toll free at 866-767-3653 or via e-mail at or


Anonymous said...

how much is the fish?

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