Along with RBC Dominion Securities, Dundee Securities has been the biggest cheerleader for Sino-Forest, the Toronto-listed Chinese forestry operator accused of a massive fraud.
And while it’s put its rating and target price under review ($C34 a share if you were wondering) it still believes Sino-Forest will be exonerated once the independent committee files its report.
Based on our review and discussions with management regarding the company’s assets and operations over the past several years, to the best of our knowledge we believe that the allegations cited in the short-sellers “research report” are false and without merit. This is now supported by the press release and management’s statements issued today.
Sino-Forest has established an independent committee to deal with the accusations accordingly. Although we expect that the special committee’s conclusions will support Company management fully, we are expecting further clarification on this process and hope that it comes quickly.
Now, Dundee doesn’t offer any further detail on why the allegations are false, but we note that some of the issues were touched upon at Sino-Forests recent AGM.
From an earlier Dundee Research report:
Sino-Forest has a 16-year track record of operations, during which time it repeatedly completed debt and equity offerings without once being the subject of legal concern. The due-diligence required in these fund-raising activities is extremely strict and comprehensive, and every offering requires an army of accountants, underwriters, consultants and lawyers. The companies that have been coming under fire recently in China don’t have the history of operations and haven’t undergone nearly the amount of rigorous due-diligence that Sino has.
Ernst and Young has been the company’s auditor for 8 of the last 10 years, and every year it performs a spot tree audit in which it spends 4-6 weeks in the field checking Poyry’s procedures and valuation, as well as conducting interviews with clients and suppliers. The auditor’s time spent in the field is in addition to its time spent performing the regular financial audit, which has always been completed with an unqualified opinion.
Not only does the top legal firm in China review all legal titles on Sino’s forest assets when they are acquired, they are also reviewed annually following the purchase. Sino’s assets have nearly every single sign-off and certification that is possibly attainable, and the fact that certain Chinese companies have been coming under fire recently is testament to the functionality of the legal and auditing system that is currently in place at Sino-Forest. The company’s clean legal history and operational responsibility in the midst of its less-than-perfect peers further confirms its culture of accountability.
So, everyone should relax because Sino-Forest has a 16-year track record, due diligence has been done on its various fund raising, it’s used the same auditor for eight of the last ten years. Which every now and then does a spot tree audit.
Not convinced — and let’s face it, is having the same auditor for eight years really a good sign? — here’s Sino-Forest’s other big fan, Paul Quinn of RBC.
While we do not have information to refute each of the allegations present, we do take issue with a few. We also point out that Muddy Waters, LLC has a short position in the stock, and therefore stands to realize significant gains in the event that the stock price declines. In our opinion, the key allegations are:
1. Sino-Forest engaged in excessive fraud from the time that it went public in 1994;
2. Authorized intermediaries are “artificial intermediaries”;
3. Yunnan province – illegal logging, fraud, and forged timber holdings;
4. Chinese government records show Sino’s timber purchases to be impossible;
and 5. Sino’s manipulation of Poyry reports.
We believe that the key question for shareholders remains Sino’s ownership of trees. Clear disclosure of the company’s plantation purchases, sales, and the long-term master agreements, preferably by a third-party source, is warranted. We also expect that investors require that the company fully address the issues raised in the Muddy Waters report. We believe that the allegations are very serious and significantly increase the uncertainty associated with the company. We await comment from Sino-Forest regarding the Muddy Waters report and the company’s strategy to restore investor confidence.
Hmm. That’s distinctly lukewarm and Quinn goes on to say that he relied on information supplied by Poyry and Ernst & Young to formulate his “outperform” recommendation. All of which might give us an indication of where this headed.
Anyway, we are with Felix Salmon, who says someone is going to lose all credibility in the wake of all this: either Sino-Forest and its supports or Muddy Waters, the independent research house behind the allegations.
Update: 12.30pm.
Sino-Forest has hit back at the evil short sellers, threatening legal action and promising an analyst trip to see its trees and some fuller disclosure. We’ve also learnt that chairman Mr Allen Chan has a good script writer.
It is important people recognize the motivations of Muddy Waters, because it is they who deliberately muddy the waters, not us. This is a company that has taken out a major short position in our company and then issued a report designed to make them money by the decline of our stock. By now they might be out of their short position and in the money. It is the rest of us that lick our wounds, while they lick their lips. I believe their report to be defamatory and I am confident that the Independent Committee’s report will demonstrate that.
Related links:
Sino-Forest responds to mega fraud allegations [Updated] – FT Tilt
The man behind the Sino-Forest takedown – Globe & Mail