Sino Forest - very interesting releases, following, background, position, funding

shootingstar

Is anyone following what's going on with Sino Forest. I didn't read the news for a couple of days given the exam and now just got right back into it.

Read up on the background of Sino Forest if you don't know the background, but in summary, an independent analyst releases a sell report; the stock going into free fall.
The accusations is that Sino cooked their books and no way they couldve went that long without funding equities. what's more interesting is that the author has a short position in it.

Sino Forest is listed in Canada but it's operations are in China and all of it's executives are based in Asia (including CEO). Shouldn't the listing in North America (ADR, crossing listing etc) be better monitoring as the listing requirement are tougher?

A Hedge fund run by John Paulson owns a lot of shares in it and also CPPIB (very big pension plan), shouldn't these big players have good monitoring system of the company?

The report states that it's a large ponzi scheme and they funded more equities instead of debt through out the 16 years., is that a good thing they are funded more equities instead of debt?

This is the most interesting thing that has happened in recent days and it's still under folding.

b_sea93

Anyhow, I bought the stock. And now I have wait and see, if not then a lot of what I studied can't be applied in real life.

bchadwick

exactly. Paulson and all these other institutional investors couldn't spot any problems with it? Just found out the financials are audit by E&Y too.

And what's surprising it, how can 1 analyst cause so much.

Colum

Well Muddy Waters did bring down China Media, which was audited by one of the big auditors... in no way are audited financial statements 100% foolproof. As an analyst, you're supposed to 'interpret' these Financial statements right?

On a side note, I thought the Muddy Waters report was interesting, although they 'do' lose credibility when you spot spelling mistakes.

Tried to purchase some puts today, my goodness the spreads are interesting. What's even more interesting is the calender spreads on them...

Carson

China has many unique issues. When I was working as an independent PM I just threw in the towel on investing in China, for the most part. No rule of law there. It is still the wild west there in many ways.

Roflnadal

Is this an exam question? or current news?

mik82

stevenevans Wrote:
-------------------------------------------------------
> Ashwin Wrote:
> --------------------------------------------------
> -----
> > ih8studying Wrote:
> >
> --------------------------------------------------
>
> > -----
> > > Well Muddy Waters did bring down China Media,
> > > which was audited by one of the big
> auditors...
> > in
> > > no way are audited financial statements 100%
> > > foolproof. As an analyst, you're supposed to
> > > 'interpret' these Financial statements right?
> > >
> > > On a side note, I thought the Muddy Waters
> > report
> > > was interesting, although they 'do' lose
> > > credibility when you spot spelling mistakes.
> > >
> > > Tried to purchase some puts today, my
> goodness
> > the
> > > spreads are interesting. What's even more
> > > interesting is the calender spreads on
> them...
> >
> > E&Y audited the Indian fraud company Satyam
> > Computers too. I think E&Y is quickly becoming
> > Arther Anderson.
> > There are many big companies in India that are
> > also borderline fraud but they all grease their
> > crook politicians' and bureaucrats' palms so
> they
> > are safe. I have this feeling that there will a
> > major blow up in this whole emerging market
> mania
> > sometime soon because these companies are so
> > difficult to trust and value due to extremely
> poor
> > corporate governance system and rampant
> corruption
> > in their native countries.
>
>
> Correction - it was PWC -- not E&Y

Thank you for the correction. For some reason I thought it was E&Y.

Roflnadal

don't hit a tre

dirk01

Hi all,

I have owned Sino-Forest for the last 6 years. Bought about 100 shares at $6.50, so not a large investment for me but it is higher risk. It went up to $24 at one point but I'm busy and didn't get around to selling. About 2 weeks ago I took a break from studying for level II to read a Canadian Business article about the China bubble and that the government has been building excess capacity in infrastructure which boosts their GDP and is unsustainable. You should take a look, it was quite interesting. I thought, hmm, maybe I should sell my only China play, Sino-Forest, but right now I don't have time to look into it, I'll wait until after the exam.... Then I kept getting trading alerts Thursday and Friday but ignored them to study. Probably just as well.

I've just spent the morning reviewing what is available online, so here is a quick summary (not complete, just a cursory view):

Carson Block is not a CFA, he is listed as Carson Block, Esq. on his reports.
His background is law and his father owns a hedge firm. Block has multiple websites under different names than Muddy Waters that cover different micro-cap China companies.

With regards to Sino-Forest
His basis is that he has researched contracts in China and believes their asset holdings are incorrect. Not really a Ponzi scheme as he says, but misrepresentation of their financial statements. He says their Free Cash Flow from Operations has been negative for 16 years and it is only through equity and debt issues that it continues operations.

Their use of RTOs to conduct business, as shell companies:
Reverse Takeovers (RTOs) are common in China, but I don't know if that has been covered in our studying. A Dundee Analyst says many companies in China do this to get around the restrictions on foreign dealings with domestic Chinese companies.
Block was incorrect with regards to how Sino-Forest can meet revenues in that he refers to quota restrictions, while Sino-Forest replied that he doesn't understand their business and that it is not selling cut lumber but rather standing forests, so not subject to quotas. His team of 10 analysts spent only 2 months gathering their information, and do not say whether they have interviewed management prior to trying to pre-sell their report to hedge funds, setting up their large short positions, and then releasing the report to the public. Oh, and usually during their quiet perior a couple of weeks before they release their annual report (as with Orient Paper as well).

My opinion:
Even if Sino-Forest is clean, the share price will be seriously impacted for several years due to this report, as management will be less focused on operations and rather on legal and regulatory issues. And investors will likely stay away as Forbes has issued a warning to investors to get out now. Who knows what is the truth? Speculation will continue:
The share price today has moved from $4 to over $5 in the last 5 hrs. Even if the allegations are true there is short term trading opportunities due to the volatility. Their Annual report is coming out June 14 and an analyst visit to their operations is set for July.

What will I do? I don't know, I'm slow to change course on such news, and I don't have a large stake anyway. I was thinking of selling in the first place, so I suppose I'll wait for the share prices to rise and then sell. Just wishing I had taken the time to get to it earlier when it was $18.

For those who have nothing to do now the exam is over.....
I have a bigger stake in a company called MicroPlanet, when I bought their IPO back in 2006. It is a new venture in Canada that reduces electrical voltage and saves energy. Again I've held it even though it's dropped significantly, but Their Annual Report just came out and is a good read if you want to review what you have been studying. The management Discussion and analysis especially. I like their premise, and am thinking about attending the AGM in Calgary June 23rd.

dmrktrading

supercooper Wrote:
-------------------------------------------------------
> Hi all,
>
> I have owned Sino-Forest for the last 6 years.
> Bought about 100 shares at $6.50, so not a large
> investment for me but it is higher risk. It went
> up to $24 at one point but I'm busy and didn't get
> around to selling. About 2 weeks ago I took a
> break from studying for level II to read a
> Canadian Business article about the China bubble
> and that the government has been building excess
> capacity in infrastructure which boosts their GDP
> and is unsustainable. You should take a look, it
> was quite interesting. I thought, hmm, maybe I
> should sell my only China play, Sino-Forest, but
> right now I don't have time to look into it, I'll
> wait until after the exam.... Then I kept getting
> trading alerts Thursday and Friday but ignored
> them to study. Probably just as well.
>
> I've just spent the morning reviewing what is
> available online, so here is a quick summary (not
> complete, just a cursory view):
>
> Carson Block is not a CFA, he is listed as Carson
> Block, Esq. on his reports.
> His background is law and his father owns a hedge
> firm. Block has multiple websites under different
> names than Muddy Waters that cover different
> micro-cap China companies.
>
> With regards to Sino-Forest
> His basis is that he has researched contracts in
> China and believes their asset holdings are
> incorrect. Not really a Ponzi scheme as he says,
> but misrepresentation of their financial
> statements. He says their Free Cash Flow from
> Operations has been negative for 16 years and it
> is only through equity and debt issues that it
> continues operations.
>
> Their use of RTOs to conduct business, as shell
> companies:
> Reverse Takeovers (RTOs) are common in China, but
> I don't know if that has been covered in our
> studying. A Dundee Analyst says many companies in
> China do this to get around the restrictions on
> foreign dealings with domestic Chinese companies.
>
> Block was incorrect with regards to how
> Sino-Forest can meet revenues in that he refers to
> quota restrictions, while Sino-Forest replied that
> he doesn't understand their business and that it
> is not selling cut lumber but rather standing
> forests, so not subject to quotas. His team of 10
> analysts spent only 2 months gathering their
> information, and do not say whether they have
> interviewed management prior to trying to pre-sell
> their report to hedge funds, setting up their
> large short positions, and then releasing the
> report to the public. Oh, and usually during
> their quiet perior a couple of weeks before they
> release their annual report (as with Orient Paper
> as well).
>
> My opinion:
> Even if Sino-Forest is clean, the share price will
> be seriously impacted for several years due to
> this report, as management will be less focused on
> operations and rather on legal and regulatory
> issues. And investors will likely stay away as
> Forbes has issued a warning to investors to get
> out now. Who knows what is the truth?
> Speculation will continue:
> The share price today has moved from $4 to over $5
> in the last 5 hrs. Even if the allegations are
> true there is short term trading opportunities due
> to the volatility. Their Annual report is coming
> out June 14 and an analyst visit to their
> operations is set for July.
>
> What will I do? I don't know, I'm slow to change
> course on such news, and I don't have a large
> stake anyway. I was thinking of selling in the
> first place, so I suppose I'll wait for the share
> prices to rise and then sell. Just wishing I had
> taken the time to get to it earlier when it was
> $18.
>
> For those who have nothing to do now the exam is
> over.....
> I have a bigger stake in a company called
> MicroPlanet, when I bought their IPO back in 2006.
> It is a new venture in Canada that reduces
> electrical voltage and saves energy. Again I've
> held it even though it's dropped significantly,
> but Their Annual Report just came out and is a
> good read if you want to review what you have been
> studying. The management Discussion and analysis
> especially. I like their premise, and am thinking
> about attending the AGM in Calgary June 23rd.


CFAI should use this post for Behavioral Finance item set. There are many behavioral issues here such as regret minimization, representativeness, overconfidence, anchoring etc.