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Sino-Forest Says Paulson ‘Supportive’ After Stock Plunge

A DHL Worldwide Express missed package slip sits on the door of Sino-Forest Corp.'s office in Mississauga, Ontario, Canada. Photographer: Norm Betts/Bloomberg
A DHL Worldwide Express missed package slip sits on the door of Sino-Forest Corp.'s office in Mississauga, Ontario, Canada. Photographer: Norm Betts/Bloomberg

June 15 (Bloomberg) -- Sino-Forest Corp., the Chinese tree-plantation owner that’s plunged 82 percent since being targeted by short-seller Carson Block, said its largest holder Paulson & Co. has advised it on how to deal with Block’s allegations.

“I’ve spoken to them and they are very supportive, giving us suggestions and issues that we need to address,” Chief Financial Officer David Horsley said yesterday in an interview.

Horsley, Chief Executive Officer Allen Chan, and director William Ardell held a 68-minute conference call with investors and analysts yesterday to refute assertions from Block’s Muddy Waters LLC that Sino-Forest overstated its timber holdings. Sino-Forest slumped 33 percent yesterday after the company’s earnings missed analysts’ estimates.

Paulson may have lost about C$520.4 million ($531.7 million) since June 1, the day before the Muddy Waters report on Sino-Forest was released. The decline comes amid increased 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 goes public by purchasing a shell company that already trades.

Armel Leslie, a spokesman for Paulson in New York, declined to comment in a telephone interview. Paulson owned 34.7 million Sino-Forest shares, or about 14 percent of the stock, as of April 29, according to data compiled by Bloomberg.

Sino-Forest dropped 14 cents, or 4.2 percent, to C$3.22 as of 4:28 p.m. in Toronto Stock Exchange trading.

Conference Call

Sino-Forest was advised against buying back its stock until an investigation by the company into Muddy Water’s allegations is complete, Ardell said on the conference call.

Sino-Forest “could have been more forceful and clear in some of their responses” on the call “but it could be that they are working under certain limitations placed on them by the independent committee” appointed to examine Block’s assertions, Richard Kelertas, an analyst at Dundee Securities Ltd. in Montreal who has his rating on the shares under review, said in a note to clients.

The 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,” Kelertas said. Dundee was among investors that helped Sino-Forest sell shares in December 2009 and also in May 2009.

Sooner Than Later

“Investors would prefer to have more of the answers they’re looking for sooner rather than later,” said Kevin Pollack, a fund manager at New York-based Paragon Capital LP who invests in U.S.-listed Chinese stocks. Pollack has never been long or short Sino-Forest, he said.

Horsley said top company executives haven’t had face-to-face meetings with investors since the week the Muddy Waters report was released.

“I haven’t been down to the U.S,” said Horsley, who was interviewed along with Chan by telephone from Hong Kong. “We were meeting with investors that week, but since then we’ve just been dealing with the situation.”

Sino-Forest, based in Hong Kong and Mississauga, Ontario, wasn’t contacted by Muddy Waters before the research firm’s report was made public, Chan said in the interview. Muddy Waters said the amount of land Sino-Forest said it bought from Lincang City in China’s Yunnan province doesn’t match city records. Sino-Forest says the report in inaccurate.

‘Total Surprise’

“Because Muddy Waters never approached the company before it issued the report, it came as a total surprise to us,” Chan said. “Had Muddy Waters approached us before the release of the report, definitely we would have had lots of opportunity to explain to them, to show them all the errors that they have made in the report.”

The company has established an independent committee to investigate Muddy Waters’ allegations and appointed PricewaterhouseCoopers LLP to assist. The probe won’t be finished for two to three months, slowing the pace of timberland acquisitions, Sino-Forest said yesterday in its earnings statement.

“This investigation is going to take a tremendous amount of time,” 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 call.

Management’s Comments

Sino-Forest reported 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 trailed the 21-cent average of six analysts’ estimates compiled by Bloomberg.

Sales gained 35 percent to $338.9 million from $251 million a year earlier. 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.

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.

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.

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

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

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