FT Alphaville » Sino-Forest transcript 14 Jun 2011

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Sino-Forest transcript 14 Jun 2011

Posted by Tracy Alloway on Jun 14 13:29.

Markets Live chat transcript for the chat ending at 13:52 on 14 Jun 2011. Participants in this chat were: Tracy Alloway John McDermott

Nihao, ladies and gents

Afternoon

We’re here for a special secret session of Markets Live

This should be a good test of whether we’ve sightly overdone our SF coverage

Shhhhhhh

We’re live-blogging Sino-Forest’s Q1 results

So far, it’s just elevator music

If you want to join us

Here are the details

The music is worth it

Kenny G in a good mood

Sino-Forest will hold a conference call for analysts and investors to discuss its first quarter 2011 results on Tuesday, June 14, 2011 at 8:30 am EST / 8:30 pm HKT. To listen to the live webcast in a listen-only mode, go to our website under “Investor Relations – Earnings Releases” or click on the following link: http://www.sinoforest.com/earningsreleases.asp

And if you want to do it the old fashioned way

North America
Tel: 647-427-7450
Toll-free: 888-231-8191

Oooh, it’s starting!

Allen Chan – chairman and CEO – is here

Plus the VP and a guy from the independent committee

First half will be earnings

Second half will be the interesting stuff – fraud allegations

Kind of related, no?

You’d think

Shall we do a quick share price check

Go for it

Trusty Google Finance tells me

TRE

Is at C$4.98

(slight delay)

a mere 75% or so down from pre Muddy Waters

Let’s see what happens during this call

Speaking of which

Someone is talking

“Suddenly facing a critical moment in our growth” says the CEO, I think

“Understand your concern and are anxious to make things right”

Interesting

They have the head of the independent commission there

To answer questions

“Independent”

Going through Q1 results now

Bah – it’s Q1 stuff now

Results “reflect continuing demand” for wood from China

Tracy, did you hear that?

E&Y “unable to complete”

Its auditing of Q1 results because of the palaver

1:37pm Ehwotay: Remind me – how independent is the independent commission?

Um, good question — the team is made up of people who were previously on and independent committee allied to the company

For the sake of completeness

Let’s stick up the Q1 headlines

I have them here

In PR format

Financial Highlights for the First Quarter ended March 31, 2011 compared to 2010:
Revenue increased 35% to $339 million
EBITDA increased 34% to $192 million
Gross profit margin per m3 from sale of standing timber was $44
IFRS accounting for fair value of financial instruments resulted in a non-cash charge of approximately $53 million or approximately $0.22 per share
EPS of ($0.08) in Q1 2011
Cash, cash equivalents and short term deposits were $1.1 billion as at March 31, 2011

1:39pm LorcanRK: Ernst and Young are the auditors??

E&Y have been for most of the last decade.

But they’ve hired PwC for the investigation.

They’ve consolidated Greenheart for the first time

Interesting

Greenheart being the subsidiary

Oooh, accounting changes

1.1bn in cash at end of Q1

They’ll need it…

http://www.prnewswire.com/news-releases/sino-forest-reports-first-quarter-2011-results-123800964.html

They’ve tweaked something with their convertible notes too

“resulting in a charge to the income statement” – 53m

Hmmm…

But recording a $450m gain too

Wow, I need to read the footnotes

Share price goes up = bad, as the equity convertibles become more valuable

Here’s what they’re talking through

One aspect in particular that has materially impacted the Company’s reported net income is the accounting for an aspect of the Company’s financing strategy and, specifically, the 2013 and 2016 Convertible Notes (collectively, the “Convertible Notes”). Pursuant to the terms of the Convertible Notes, the Company has the option to settle the Convertible Notes by delivering cash or a combination of cash and common shares. IFRS requires the Company to fair value this option as an embedded derivative liability at the end of each reporting period. As the Company’s share price increases, this option becomes more valuable (or more costly to the Company) and therefore results in a charge to the income statement. As at March 31, 2011, the share price was Cdn$25.30 which resulted in a charge to the Company’s income statement of approximately $53 million.

As the share price decreases, the equity convert option becomes less valuable (less costly to the Company) and therefore results in a gain being recorded in the income statement. Based upon the closing price of the Company’s common shares on Friday, June 10, 2011 of $4.47 per share, the Company would record a gain from fair valuing the option of approximately $450 million in the Company’s Q2 2011 income statement.

In order to prevent the share price volatility from impacting the income statement, the Board of Directors has approved amendments of the indentures governing the Convertible Notes to remove this option. Such amendments do not require the consent of the Convertible Note holders and the Company will take the required steps to implement the amendments. In future quarters, after Q2 2011, the volatility of the Company’s common share price will no longer affect the reported net income in such manner.

An additional impact on the Company’s reported profit before tax when compared to Q1 2010 as previously reported was recording a gain on the change in fair value of planted plantations and additional charges to Cost of sales, Selling and administration expenses and Finance costs. The gain on change in fair value of planted plantations was $10.4 million and the additional charges to Cost of sales, Selling and administration expenses and Finance costs was $10.1 million.

1:43pm milky: Hi, why the special on-air?

Because we’re just that kind

Because…

We can?

While the basis of calculating the Company’s tax provision methodology changed from Canadian GAAP to IFRS, the actual provision in the income statement was not materially affected in Q1 2011. However, as a result of new information that has become available in Q1 2011, the Company now assesses income tax by applying the rate of 15% for operations in all provinces in the PRC (as compared to only certain provinces in Q3 2010) where the Company conducts business. This has resulted in an additional non-cash tax charge in Q1 2011 of approximately $6.0 million.

(z1p – Yep, that was on this morning’s session of Markets Live)

Selling and administrative expenses rose from $23.0 million in Q1 2010 to $30.3 million in Q1 2011 primarily due to the fact that Q1 2011 includes the consolidated results of Greenheart Group including Selling and administrative expenses in the amount of approximately $5.8 million compared to nil last year. Last year, the Company did not exercise significant influence on Greenheart Group and therefore did not consolidate its results.

There’s some of the impact of the Greenheart consolidation

Right, guy saying now that if you want to compare Q1 results to last year’s results

You have to go through some insanely complicated process

Here’s the CEO

Mr. Allen Chan, Chairman & Chief Executive Officer

Blah, blah

Sector growing

China wanting more paper

“ideally placed to continue to benefit”

He’s basically repeating this

Bit from the press release

So you’re not missing much

If I copy it

“Despite this unfortunate situation, we will continue to focus on our business strategy of expanding operations. With $1.1 billion in cash and $3.6 billion of standing timber assets, Sino-Forest can continue its growth through acquisitions and through sustainable long-term replanting without accessing the capital markets. The outlook for China and its forestry sector remains positive for 2011 as the country continues to benefit from relatively strong economic growth, driven by broad-based industrialization and massive urbanization. At our May 30, 2011 annual shareholders meeting, we indicated our intention to target an annual wood fibre output of 30 million m3 by 2013 after we sold 17.6 million m3 of fibre last year. We remain confident that we can achieve this compound annual growth rate of nearly 20%.”

Talking about new acquisitions in Yunnan

The province questioned by Muddy Waters

Talking about the diameter of threes

*trees

25-50 years old

apparently

Guess that can tell that by the rings?

Dendrochronology

http://en.wikipedia.org/wiki/Dendrochronology

Did you hear about that guy that accidentally killed the world’s oldest tree?

Does he work for Muddy Waters?

“I wish we could only talk about the positives…”

Nah, it was on Radiolab

But…

Here if anyone’s interested

http://www.seanrasmussen.ca/2010/07/radiolabs-new-episode-oops-and.html

Here we go, the accusations.

CEO

“deeply disappointed by the losses”

“personally stand by that audited statements are accurate”

“personally stand by and guarantee” that the reports are accurate

is that all he’s going to say?

Erm…

“we have tried our best to address concerns”

by posting stuff on their website

“I want to use this call as an opportunity to help clear the confusions”

“are no inaccuracies in our public statements”

going through the steps they’ve taken

independent commission

continue to grow operations while this is happening

“public reputation” will be restored in due course

now turning to the business model

has a “purchase model”

and a “planting model”

(this is the point about the 50,000 trucks)

“we cannot own the land”

“we can only buy the trees or grow the trees”

(i.e. don’t need to chop all them down and turn them into chips to make money)

(“tree-flipping”)

discussing the size of China

it’s big

it has lots of trees

slide 37…

talking about intermediaries

which was the key MW allegation

MW said they were the core of the “ponzi” scheme

1990s had to use offshore structure

“supplies and the buyers are two different companies”

BVI companies can own trees

But not plant and sell them in China

Hence the need for these China subsidiaries

AH, okay

Tracy

I think he’s saying that

Uh huh?

Sino-Forest sells

the trees

to its subsidiary

in the British Virgin Islands

and when they grow

(and add rings)

Sounds like it

to the point where they can sell them

the BVI sub

“A BVI company has to go through this kind of arrangement”

“For the Chinese market”

sells them back to the Chinese subsidiary

who then sell them on

these Chinese subs are responsible for the Chinese taxes

ZOMG

convoluted, much?

yes

its argument

is that

this is what Chinese rules means has to happen

(not to mention tax strategy)

1:59pm Joseph Cotterill, FT: (PS – Did we know there is Sino Forest CDS? Apparently it’s around 900bps)

We do now.

Still talking about this model…

GAC – Yes it keeps timing out…

Wait

“We don’t want to disclose the names of the AIs”

“Because the Chinese forestry business is very competitive”

2:01pm Icarus: @JM – there must be more to it than that, because the BVI company has to sell the trees at some point, even back to a Chinese company. They must be allowed to sell the trees back to a related entity.

It would be giving out a “competitive advantage to others”, John

“we have disclosed to E&Y, our auditor, the names”

But they disclose them to their auditors – E&Y

well that’s alright

Oh, here’s the independent audit process…

@Icarus — isn’t the point that they sell them back to these Chinese subs

“sloppy research” by Muddy Waters

here we go

Rebuttals

1. business model mix-up

2. ignores other plantations in Yunnan

FYI

(Goladaman – yep, they did)

This is what RBC said — very similar — in Friday’s “outperform” research note

3. the AI is the buyer, only; not the supplier and the buyer

@Icarus — sorry, didn’t mean that, on the call they said they had to use the BVI to hold the trees before selling them back

(Typing v fast)

Now the head of the independent commission is on

“we look forward… to having our reputation restored”

“we understand the urgency of the situation”

William (Bill) Ardell – Chairman of the Independent Committee
Lead Director since 2010; nominated as Director since 2010; previously President & CEO and a director of Southam Inc. Bill was director for a number of entities in the public and private sectors, including not-for-profit organizations, serving in varying capacities as Chairman, Director, or member of the board committees. He began his career with Touche Ross in

That guy

Going through who’s doing the investigation

James (Jamie) Hyde
Director since 2004; previously Vice President, Finance and Chief Financial Officer, GSW Inc., Executive Vice President and Chief Financial Officer, Resolve Business Outsourcing Income Fund, Former Partner, Ernst & Young LLP, where for 24 years he provided a board range of professional services to public and private companies.

James (Jamie) Bowland
Joined the Board in February 2011; former Managing Director at BMO Capital Markets, Investment & Corporate Banking Group; extensive experience in mergers & acquisitions, capital markets and corporate banking. Jamie is a Director of a number of TSX-listed companies and not-for-profit organizations.

Will take at least 2-3 months

For the complete PWC report

QUESTIONS

Awww, that’s WAY too long!

Dundee Capital Markets

First question

There was a fixed income tour of central forestry bureau

where the analysts met the AIs

(Dundee, who said the Muddy Waters report was “a pile of crap”)

The analysts met one of the “major AIs”

Dundee’s asking now if the equity guys can meet AIs too

Equity analysts will get to meet the AIs

But we won’t know who they are

Dundee analyst is Richard Kelertas, btw

Tracy

No-one has talked about Poyry yet

If you Google image Sino Forest AI…

The consultancy who MW allege confirmed

All SF’s valuations

You get a stick figure

With, allegedly, 0.3% of the data

Next question

Sean Stewart, PG Securities

1. Will acquisitions be curbed, by how much?

(And why isn’t anyone talking about cash-flow as per the Nomura note.)

Answer: intend to slow down, “but we have certain room” to do more Master Agreements

They have flexibility – can go faster or slower

Silence on the line

BarCap

Question about tax liabilities

(BBB+ – it’s over here, scroll down: http://can-turtles-fly.blogspot.com/2011/06/sino-forest-sells-off-potentially.html)

“isn’t it a bit worrying that you don’t know whether your AIs have paid their taxes?”

Sino Forest says it’s accounting for AIs not having paid taxes

Another question

Any chance of a share buy-back?

OMG, really?

“if we had the choice we certainly would”

but counsel says they can’t

CEO says personally would have done so

advised by counsel that they can’t until exam is finished

another Q, sorry I missed the name

slide 9

Scotia Capital on the line, I think

Why so much revenue from standing timber, rather than logs?

Answer: apparently there’s not a lot of logging in Q1/Q2

(z1p – stay tuned, we’ll finish with some Portugal stuff)

+ they’re predisposed to standing timber cos of it’s business model

Another question

Per log sales down

But overall log profit margins up

How come?

Answer: apparently the logs are smaller in diameter

While overall value has gone up

(Tracy — feeling a bit out of my depth! All a bit A-level geography)

Someone asking about currencies now

Question: “are all these figures in USD?”

Some confusion

Slide 27 – all transactions are in USD

apparently, after some discussion

2:19pm Ehwotay: Does the log answer make any sense?

If you take their argument that demand for logs has increased enough to overcome smaller average sizes.

I.e. if they can get more for less

heehee

Ah, Credit Suisse

average log size

Tracy posted on their note earlier

No, that was Credit Sights

Ah, I take it back

Something about the outlook/growth again

2:21pm GAC: Depends on who does the valuation of the logs.

“If we want to change gear we can change gear” says CEO

YOu would have though they’d be keen to change gear.

I’d be trying to conserve cash

Until you can prove everything’s ok

But what do I know

I’d be getting every anlayst on a plane right now, with E&Y, with PwC. And give them freedom to see as many forests as they wanted.

Next question

Yeah, but seeing doesn’t prove ownership!

Paul Quinn, RBC

The only analyst keeping an out-perform rating

last week

Q: will you be able to do debt repurchases during the investigation period?

A: (paraphrase) we’re a bit busy, Paul

TA — good point, might want to bring your own layers

lawyers, even

(though it might be cold)

PwC will have to go to every single bank, apaprently

Which will take time

presentation: http://www.sinoforest.com/pdf/presentations/SFC_IR_ppt-Q111.pdf

Another Q

Yunan!

When will all the data be up on the website?

Answer: soon

New Question

Nomura on now

From Nomura

Q: “is the company in compliance with all the planting regs in China?”

A: Yes

Q: can you put the docs online?

A: if we’d done things wrong, they’d have already informed us

Q: what is the current cash level of the company?

A: 1.1bn end of March

“some of the cash has been used in normal operations”

but no major acquisitions or purchses

Oooh

They just shutdown the Nomura lady

will disclose the rest at end of June

yup

Only three questions allowed

smack down

Here’s RBS

looking for an update on the regulatory investigations

And something about AI taxes again

and another question about what taxes the company need to pay to take the assets offshore

i.e. what’s the liability for moving assets from AIs to BVI (I think)

Another Q: will we get ad hoc updates on the investigation?

will we get a newsflow?

“Part of our concern is putting out info on a piecemeal basis”

Answer: no

They want to do a full report

For certainty

WHAT ABOUT POYRY?

But if they find something important

They will make it public

Deutsche Bank

Poyry-poor so far

“Do you think your funding profile will change in the future?”

A: Not going to market for equity in the near-term

I hope Nomura comes back on.

Will access China Development Bank instead

(Z1p – there’s been an update from High-Frequency Economics)

More about convertibles, which I don’t quite get.

(on the Portugal thing – here: http://ftalphaville.ft.com/blog/2011/06/14/593766/a-portuguese-correction/)

I remember Nomura was critical of their accounting re convertibles

TA — Am I naive to expect Carson Block to ask a question at some point?

I bet he’s banned!

ROTR — do we have a TRE price update?

I remember Ryanair used to routinely ban analysts from their conference calls

So it can be done

(Google Finance 15 min lag)

Back to RBS

Again?

External funding again

“What are your banks telling you now?”

And then lot’s of noise on the line.

(A Reader – sadly I am listening to the webcast, am not on the call)

Uh oh

RBS has been silenced

Credit Suisse, this time.

Q: Do they have a letter from E&Y confirming they disclosed the AIs?

Good question: do the committee members have any personal liabilities?

Re personal liability: “I don’t have an answer to that question” It’s the same as any board member, we have a fiduciary duty.

Regarding E&Y

“Can’t comment” on what E&Y do with the info

“I can certainly ask them to provide a letter. It’s quite unusual.”

Last question

Standard Chartered

Something about whether they’ve had any Qs from the local authorities

Whether they get questions from the local authorities

Answer: No

Laughter!

Oh my

NO QUESTION ON POYRY

Sorry John

But you can email them questions

*****CALL OVER*****

Maybe you should go for it

Well, John – what do you reckon?

Hmmm.

On one hand,

Actually step back

The allegations are about

John claims he’s ‘just been disconnected’

From FT Alphaville

Clearly he’s just ducking the question…

Sorry, tech issue

I blame Neil

Worried that we’re sabotaging ML

Anyway

What are main MW allegations?

1. Assets / trees

2. The Artificial intermediaries

3. Poyry

And what else is getting people worried?

4. Cash-flow

They did a strong effort at tackling 1 and 2

But 3 wasn’t addressed

And Nomura was cut off when it pressed on 4

So, a mixed result,

But probably enough to keep it muddling (sorry) through

Until the report is pubbed

Though at 2-3 months that will spook investors big time

What do you think?

I dunno

I thought it was interesting to learn today

That Muddy Waters pulled the same trick last year with Orient Paper

@Swedes — good question.

And the allegations ended up being wrong

@Swedes — yes.

But Orient never really recovered

Maybe Muddy Waters are targeting really vulnerable companies

With extremely convoluted ownership structures

It’s kind of a self-fulfilling prophecy with Sino-Forest anyway

Because of that reliance on external funding

Anyway, we know what the market seems to think

2:47pm A Reader: Sino is down 7% in Toronto.

Shares are down after the earnings and the call

We’ve got some updated short interest data from Data Explorers too

Here it is

Currently 27% of TRE’s total shares are outstanding on loan, which represents almost 90% of the supply of shares that could be borrowed. This means it would be hard to short more of the company.

That should tell you something

(oilcan – I believe there’s a list here: http://www.chinastockdigest.com/articles/Listed-Companies-of-Shenzhen-B-Shares.html)

John, shall we finish up?

Yes, sure.

Thanks everyone for joining us today

Ad hoc ML, over for another day.

Neil and Bryce will be back tomorrow morning

See you in 2 or 3 months

For the full Sino report, presumably!

And Cardiff and I will be doing USML on Friday

See ya!

This entry was posted by Tracy Alloway on Tuesday, June 14th, 2011 at 13:29 and is filed under Uncategorized. Edit this entry.

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Sino-Forest transcript 14 Jun 2011

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