From those loyal analysts at RBC Dominion Securities on Friday, a note entitled:
Evidence Mounting in Sino’s Favour
RBC puts forward three main reasons why Muddy Waters is wrong and Sino-Forest warrants an “out-perform” rating. We’ll let you decide whether “mounting” is justified in the note’s title (or instead whether “in” should be removed.)
First, Greenheart, a Sino-Forest subsidiary questioned by Muddy Waters, does exist after all. Phew. Thus, the implication is that MW didn’t thoroughly do its homework.
Greenheart does indeed have business registrations in Suriname. On Muddy Waters’ analyst call on Monday, the short seller alleged that its researchers had been unable to find any business registration records for Greenheart in the small South American country of Suriname. Greenheart’s press release on Thursday morning provides a clear list of its various subsidiaries in that country and its registration numbers with the local Chamber of Commerce & Industry.
Second, about those trees in Yunnan. RBC reiterates a point it made earlier: Sino-Forest’s business model (“flipping” trees) means that it didn’t need 50,000 trucks to transport timber. Sino-Forest sold them as standing timber. Plus, its records say the trees exist, so there.
Sino has timber outside Lincang city. According to the Muddy Waters report, Sino only has timber in Lingcang city totalling 20,000 ha. Sino’s data room shows purchases outside Lincang city in Yunnan province. Sino reported timber ownership on 186,700 ha in Yunnan province at the end of 2010.
Third, Poyry, the consultancy that Sino-Forest allegedly fed dodgy data, implies an overly conservative estimate for how much and how quickly value could be extracted in a “liquidation scenario”.
Exhibit 1 shows that Poyry’s valuation report estimates the value of Sino’s timber assets at the end of 2010 to be US$3.1 billion. Sino is currently trading at half the valuation implied by the Poyry report for equity holders. The Poyry valuation assumes a single rotation
(using a pre-tax discount rate of 11.5%). We believe Poyry’s valuation scenario uses an unrealistically long time-frame of 10 years to harvest the 93.2MM m3 of timber, thereby penalizing valuation. We think a liquidation scenario would more likely see the timber
harvested in a far shorter five-year period. Our liquidation value of US$4.1 billion is higher than Poyry despite our higher discount rate of 14.0%.
And there are some aspects of Sino-Forest that Poyry undervalues, says RBC.
A significant part of Sino’s potential value is in replanting its timberlands (which are leased) with faster- rowth, high-yield (FGHY) plantations. We believe that Sino can achieve double the current harvest volumes in less than half the rotation time. This results in significant value that the Poyry valuation doesn’t consider. We value the reforestation component of Sino Forest at $3.9B to $6.9B.
Meanwhile, there is mounting scepticism on the TSX:
Related links:
Migao caught in Sino-Forest’s storm – Financial Post
Sino-Forest: the case for the defence – FT Alphaville
Sino-Forest – a defence [updated] – FT Alphaville
FT Tilt’s Sino-Forest coverage