Bloomberg News

Sino-Forest Falls After Saying Probe Will Slow Acquisition

June 14, 2011

(Updates with closing share price in sixth paragraph.)

June 14 (Bloomberg) -- Sino-Forest Corp., the Chinese timber grower that short seller Carson Block said overstated its production, fell after saying an investigation won’t be finished for two to three months, slowing the pace of tree acquisitions.

The shares dropped 33 percent to a five-year low in Toronto after posting first-quarter earnings today that missed analyst’s estimates. It also said on a conference call it won’t be able to buy back shares until after the probe.

Sino-Forest, whose biggest shareholder is Paulson & Co., has tumbled 81 percent since Muddy Waters LLC, founded by Block, said in a report published June 2 that the timber producer is a “fraud” and overstated concessions in China. Sino-Forest established an independent committee to investigate the allegations and appointed PricewaterhouseCoopers LLP to assist. Sino-Forest today reiterated its response that Muddy Waters’ report is “inaccurate, spurious and defamatory.”

“I just don’t think they are able now to address all the questions that are out there,” Brian Topp, a Toronto-based analyst at Maison Placements Canada Inc. who has a “hold” rating on Sino-Forest, said in a telephone interview. “The market is taking it negatively because they essentially aren’t providing enough detail because they can’t.”

Sino-Forest dropped C$1.62 to C$3.36 as of 4:49 p.m. on the Toronto Stock Exchange, their lowest price since Nov. 4, 2005. Shares of the Hong Kong- and Mississauga, Ontario-based company have declined 86 percent this year, the worst performance on the S&P/Toronto Stock Exchange Composite Index.

‘Aggressive’ Timeline

Investors and regulators have increased their scrutiny of Chinese companies trading in North America. The U.S. Securities and Exchange Commission began a probe in 2010 into the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades. The Bloomberg Chinese Reverse Mergers Index of U.S.-listed stocks has fallen 45 percent this year.

“This investigation is going to take a tremendous amount of time,” Chief Financial Officer David Horsley said on the conference call. “That’s going to impact in the short term our ability to continue the acquisition pace we were on for the year.”

The timeline for the investigation is “aggressive,” Muddy Waters said in a statement that it posted on its website following the conference call.

Conference Call

“Senior management came out swinging in the conference call,” Richard Kelertas, an analyst at Dundee Securities in Montreal who has his rating on the shares under review, said in a report. Dundee was among investors that helped Sino-Forest sell shares in December 2009 and also in May 2009.

The call’s question-and-answer session “was a bit short and it is our opinion that some questions were likely not answered to the satisfaction of equity analysts and investors,” he said. “The company could have been more forceful and clear in some of their responses but it could be that they are working under certain limitations placed on them by the independent committee.”

Sino-Forest had a first-quarter loss of $20.7 million, or 8 cents a share, compared with net income of $15.9 million, or 7 cents, a year earlier. Excluding a charge of about 22 cents related to conversion to International Financial Reporting Standards, profit was 13 cents a share. That missed the 21-cent average of six analysts’ estimates in a Bloomberg survey.

Sales gained 35 percent to $338.9 million from $251 million a year earlier, the company said. The plantation area under management in China at the end of the quarter was 866,600 hectares (2.14 million acres), up 9.9 percent from the end of the preceding quarter.

Short Seller

Block, 35, who stands to make money from declines in Sino- Forest’s stock, said in a June 6 Bloomberg Television interview he will keep betting against the company until its shares reach “zero.”

Short selling, the sale of borrowed shares with the hope of profiting when they fall, more than doubled to a record 35 percent of Sino-Forest’s outstanding stock as of June 2 from 17 percent on May 2, according to Data Explorers, a New York-based research firm. While bearish bets against the stock have retreated to 28 percent as of June 10, Sino-Forest remains the most-shorted stock in the Standard & Poor’s/TSX Composite Index.

The Muddy Waters report said the amount of land Sino-Forest said it bought from Lincang City in China’s Yunnan province doesn’t match city records.

Regulatory Probe

Sino-Forest said on June 8 it asked the Toronto Stock Exchange and the Investment Industry Regulatory Organization of Canada to probe trading in its stock. The Ontario Securities Commission said the same day it was studying “matters related” to the company. Moody’s Investors Service put Sino-Forest’s Ba2 corporate family and senior-unsecured ratings on review June 7.

Sino-Forest has “adequate liquidity” based on an analysis of its audited financial statements, Standard & Poor’s Ratings Services said June 9. S&P rated Sino-Forest’s long-term debt BB, two levels below investment grade.

The company was advised against buying back its stock until the investigation is complete, William Ardell, a director, said on the call.

--With assistance from Nikolaj Gammeltoft in New York. Editors: Simon Casey, Cecile Daurat

To contact the reporters on this story: Sonja Elmquist in New York at; Christopher Donville in Vancouver at

To contact the editor responsible for this story: Simon Casey at

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