Sino-Forest or sigh-no-forest?

Considered strictly as entertainment, however, an analyst’s report into the company’s activities is remarkable


Timber company Sino-Forest is locked in a fascinating battle for survival against Carson Block, a stock analyst with a mixed record of publicity attacks on Chinese-based enterprises. With professional analysts reluctant to say what they make of Block’s “strong sell” report on Sino-Forest, I’m in no position to endorse it as a piece of financial advice or investigative journalism. Considered strictly as entertainment, however, the report is remarkable.

Block has documented that Sino-Forest operates with extraordinary opacity for a company whose holdings are surely very widely distributed—particularly, one assumes, within Canada. Sino-Forest claims to be doing hundreds of millions of dollars’ worth of sales through mostly unidentified “authorized intermediaries” in China—traders who are apparently happy to let the company buy title to trees, hold them as they appreciate, take on the bulk of the costs and risks in the meantime, and then snap up revenues when the trees are eventually converted into wood products. Block, having poked around a bit in the literal Chinese backwoods, questions whether much if any of the reported underlying activity is happening.

Defenders of the company compare the business model to “property-flipping” in the real estate markets, and its CEO has emphasized that Sino-Forest is not at all like a typical Western forest company that sees trees right through to the part where they’re giant stacks of two-by-fours. I suppose the question I would have as an investor might be “Is ‘tree-flipping’ a game I want to be in, even if Block’s accusations are false?” Testing the veracity of those accusations is a process that the company acknowledges will take some time and legal/technical trouble, even as journalists cover the same ground as Block and find discrepancies and mysteries of their own. Globe and Mail reporters tried to confirm some of Sino-Forest’s timber ownership claims with a provincial forest ministry, and when they received essentially a series of dazed blinks and shrugs, the company proffered this defence:

As a matter of course, when we purchase trees only, we obtain a confirmation of our ownership from the local county or city Forestry Bureau for the local area in which we purchase, not the provincial Forestry Bureau. Sino-Forest’s ownership of its forestry assets in the Yunnan province is voluntarily documented in each case by the local or city Forestry Bureaus, not at the provincial Forestry Bureau level. As a result, officials at the provincial Yunnan Forestry Bureau would not have an official record about Sino-Forest’s local forestry assets.

Again: this defence may be 100% accurate. But if you’re a Sino-Forest investor, how happy are you to hear that a simple double-check on the existence of an asset is so difficult? If I own shares in the Ford Motor Co., I can always go down to the lot on an off day and kick tires on some of the new models—make sure the “Ford” badge is still turning up on the trunk and whatnot. When I read that paragraph in the Globe piece, I want to run from Chinese investments like my hair is on fire. (Admittedly, I do come from a long line of dismal literalists. When I bought real estate for the first time last month I was a little disappointed not to receive some kind of enormous lambskin scroll like you’d see in a cartoon, with “DEED” written across the top in blackletter.)

Sino-Forest is refusing, despite intense pressure, to make a full disclosure of the identities of the “authorized intermediaries” who are making its money. The company claims that to do so would put it at a competitive disadvantage, which makes one wonder why its business model ought to depend so heavily on sheer obscurity. One possible answer is that Sino-Forest’s real, fundamental business is some sort of cryptic regulatory arbitrage; that seems like a game potentially worth playing with paper assets in places that have a strong rule of law, but it is surely a dangerous one in a nominally Communist country, where a nationalization could be arranged in the space of an afternoon. (Or where some regional Party functionary could simply be bribed to “lose” crucial paperwork.)

One also wonders why Sino-Forest is refusing to announce, or apparently even to contemplate, a buyback of its clobbered shares. The Financial Post’s David Pett pointed out last week how weird this is, especially considering the large cash hoard the company claims to be sitting on. “Sino-Forest said its counsel informed it that it is ‘precluded from purchasing stock in the current circumstances,’ but did not elaborate,” wrote Pett. “Since the company has claimed there is nothing of substance to the Muddy Waters report, it is unclear why it would be ‘precluded’ from such an act.”

Perhaps the most amusing part of this whole tale is watching the oddball behaviour of the analysts. Richard Kelertas of Dundee Capital Markets called Block’s report “a pile of crap” a week ago; he then converted quite suddenly to agnosticism and withdrew coverage of the stock yesterday. Fellow defender Paul Quinn of RBC Capital Markets is standing by his “outperform” rating on Sino-Forest, but has revised his price target downward to $14/share, offering this tidbit of practical epistemology:

Either a material difference in ownership, financial results, and legality of the company’s legal structure exists, with a loss in equity value, or it does not, and the company’s equity value increases measurably. While we remain objective to either possibility, further clarity is required to reach a definitive outcome.

If that is the case, one wonders, then why is Quinn pricing the stock at all? An analyst’s target is, by implication, a pretty “definitive” guide to an investor’s proposed action; there’s no third choice beyond “own this stock” and “don’t”.

Of course, Quinn is hinting at an important mathematical difference between kinds of “assets that are in some sense worth $14”. There’s the kind that might be worth $15 and might be worth $13, with about equal chances on either side. And then there’s the kind that has a 10% chance of being worth $140 and a 90% chance of being garbage. If you happen to have infinite cash to invest, you will be genuinely indifferent to this distinction. For the rest of us, that sort of thing matters.


Sino-Forest or sigh-no-forest?

  1. “Richard Kelertas of Dundee Capital Markets called Block’s report “a pile of crap” a week ago; he then converted quite suddenly to agnosticism and withdrew coverage of the stock yesterday.”

    This is an important illustration of how analysts behave. Rather than “sell” rate anything, they will simply drop it. I’m sure Kelertas is now embarrassed by his previous behaviour; I’m equally sure that his clients would be better off if he made serving them a priority rather than serving his own embarrassment.

    The even more embarrassing question of why analysts think it’s appropriate to give “strong buy” ratings to stocks whose legal risk profile they don’t understand, has not yet been asked (at least not publicly) but I hope the question is coming.

    • I still have an original copy of CIBC Wood Gundy’s Strong Buy analyst report  on Bre-X from a few months before the shit his the fan

  2. Sino-Forest has released just one single series of documents on a
    transaction in 2010-2011. All other documents concern transactions dating to 2007.  The 2011 filing concern the purchase of timber rights on acreage near Wenquan Village, 
    Yongning, Yunnan. Yongning is in a mountain basin at 9000 feet,
    north-east of the major bend in the upper Yangtze. It is near the
    tourist attraction of Lugu Lake.

    Folks wanting to geolocate can use: 27.824247° N 100.696406° E

    This is an image of the road NW of Lugu Lake enroute to the hotsprings at Wenquan.

    This is Yak pasture not Forest.  The most charitable case is  the business model was flipping “rights” to speculators inside China.  This is really just selling “Florida swamp” to rubes.

  3. My investment advice would be to ask if someone is right wing or left wing.

    If you are right wing and care about rule of law, property rights and the like, do not invest in China. 

    If you are left wing and think Government controlled investment is good idea, invest in China. 

    Everyone should read P Pan’s Out Of Mao’s Shadow and decide if China sounds like good place to invest or not. 

    “The 10 or so intersecting stories he tells here are gritty and real. This is not a big-theme book about the “true” China but a concrete, closely observed encounter with particular people, places and events. 

    He puts the reader on a stool in the small shop of laid-off steel worker Yao Fuxin as Yao and some colleagues plot a doomed demonstration against corrupt local officials in the rust-belt city of Liaoyang. We run through cornfields with blind activist Chen Guangcheng as he escapes from government thugs in his home village, hoping to carry a petition for justice all the way to Beijing. 

    Another theme is the alliance of the party with private entrepreneurs, represented by a richly loathsome female property developer named Chen Lihua. She specializes in acquiring land in Beijing through cronyism and forcibly evicting tenants with police assistance. 

    Pan reports her rags to riches story, visits her lavish office and notices nine separate photos, one of her with each member of the party’s top decision-making body, the Politburo Standing Committee. Chen, too, is proud of her achievements and especially of knowing how to work the system; she reflexively offers Pan a bribe.”

    • Are you for real?

      • Yes. Are you?

        •  Respecting the rule of law is not a left-or-right wing issue. I’m disgusted by the politics of China and I’m left of centre.

          • Did you speak out against these cases or do you agree with decision of Government/State to break law?

            In Canada, the rule of law is only a nice sounding theory or principle. In practice, there is no consistency and much justice depends on your ethnicity. 

            But I’m puzzled by the decision of Commissar Lynch’s enforcers: If it’s okay for Imam al-Hayiti to say homosexuals and lesbians should be “exterminated”, why is the Reverend Stephen Boissoin under a lifetime speech ban merely for objecting to gay marriage? Why are bald statements of Islamic supremacism cool when an imam makes them but the subject of a week-long trial in Vancouver for an infidel magazine that quotes such an imam?


            When the woman refused, the Lucky Moose owner had her sit down on the floor in the store between two ­cashiers. She waited there for five hours before police arrived at 10 p.m. The police officers dissuaded Mr. Chen from pressing charges against the woman, he said.

            “A judge, fearing that native blockades were destroying the “rule of law” in his community, forced nearly a dozen lawyers into his rural Ontario courthouse yesterday for a highly unusual court hearing.”


    • You do worry me sometimes with your obsession over left and right, which really only exists in narratives (far left and far right may be different).  Witness the fact that you have to TELL people to use their natural gravitational pull to help them make decisions.  Because, for most of us, that means up or down.

      • 2Jenn – Don’t have much time to reply but we make decisions based on our political selves. Right wing people will be leery of investing in China because of their values/beliefs and left wing people will be less scared of China because of who they are. 

        This shows just how thoroughly ideological we are. Our broadly political commitments reverberate even in our judgments about the metaphysics of the self. The authentic self is the ideologically-validated self. 

        This may help explain the widespread tendency to see those with whom we fundamentally disagree as victims of “false consciousness”. We cannot help but suspect that they are in the grip of some kind of illusion, while we are clear-eyed and at home in the world as it is. 

        Our ideological opposites are not only at war with truth, but alienated from their true selves.

        • I think you miss my point a bit.  This may be all well fine and good for people who identify themselves as left-wing or right-wing, but the vast majority of us neither knows or cares which ‘wing’ they are on.  I think most Canadians would be a bit leery of investing in China–until they are confronted with an investment that happens to be in China, if you see what I mean.  The theoretical vs. an opportunity in front of them.  One issue at a time, and if a trend develops it would be a surprise.

          Or in other words, most people are not idealogical at all, or if they are they don’t recognize that aspect of themselves.  Less than 2% of us belong to a political party of any kind.  Only 60% or so vote.

          On the other hand, I laugh at the illusion that has you in its grip, since I am clear-eyed and at home in the world of reality.  :)  Of course, I ride in the middle of the wings :)

          • ” I think most Canadians would be a bit leery of investing in China–until they are confronted with an investment that happens to be in China  ……. Or in other words, most people are not idealogical at all, or if they are they don’t recognize that aspect of themselves.”

            This is what I am talking about. People leery of investing in China because they are ignorant of China and not sure what to do or how to invest. People ask experts and will get conflicting advice because experts are not certain what’s happening in China either. 

            Whether someone decides to proceed or not will most likely reflect their political beliefs, regardless if they are aware of them or not.  Political beliefs are more than which party you vote for or donate money to.

            I have two female friends who know PM’s name but not what party he belongs to and that’s it for politics.

            They are both left wing, teachers at public schools and fit every stereotype but they don’t vote and know next to nothing about politics.

          • Truly astounding how much ignorance there is out there, isn’t it?  Did they at least know he wasn’t our President? But I digress.  I think that most people, unlike you and me and everyone else on these boards, do not sit around and think of where they stand on theoretical issues.  And in most cases, it is self-interest that determines the answer–like someone I know who thinks he is conservative because he’s all about business interests.  Until he supports the teacher’s striking–because his wife is one.  Or the union guy who shops at Wal-Mart because he gets such a good deal.  Or the business owner who thinks wages should be set by the market, and cannot understand why he’s paying more in training new hires than in getting any work done.  Personally, I think life would be much easier for them if they DID sit around and think of theoretical issues and their stand on them, and the country would be better served if they then joined the political party of their choice.  But in the meantime they’ll have no idea what to do with a stock in China.

  4. Guys like Carson Block and Andrew Left (Citron Research) have built enough credibility on these Chinese scams to scare me away whenever they get something in their crosshairs.

    Check out the saga of China Media Express (CCME). They took down a Chinese company with a Big 4 auditor (Deloitte), a significant institutional investor with the ability to do due diligence beyond that of mere retail investors, and insider buys from the CFO. I’m sworn off all China investments after that until the governance model improves.

  5. “But if you’re a Sino-Forest investor, how happy are you to hear that a simple double-check on the existence of an asset is so difficult?”

    I read that sentence and thought how that sounds a lot like Canadian government. 

    Wells’ could easily write “But if you’re a Canadian taxpayer, how happy are you to hear that a simple double-check on the existence of a Strategic Review is so difficult?”

    What I find most odd about all this, is that I well remember James Fallows interview with a ChiCom and his view of what’s wrong with America sounds remarkably right wing.

    Gao Xiqing, president of the China Investment Corporation, which manages “only” about $200 billion of the country’s foreign assets but makes most of the high-visibility investments, like buying stakes in Blackstone and Morgan Stanley, as opposed to just holding Treasury notes.

    Q: About the $700 billion U.S. financial-rescue plan enacted in October?

    A: Finally, after months and months of struggling with your own ideology, with your own pride, your self-right-eousness … finally [the U.S. applied] one of the great gifts of Americans, which is that you’re pragmatic. 

    Now our people are joking that we look at the U.S. and see “socialism with American characteristics.” [The Chinese term for its mainly capitalist market-opening of the last 30 years is “socialism with Chinese characteristics.”]

    It is joking, and many people are saying: “No, Americans still believe in free capitalism and they think this is just a hiccup.” 

    This is like our great leader Deng Xiaoping, who said that it doesn’t matter if the cat is white or black, as long as it catches the mouse. It doesn’t matter what we call this. It’s pragmatic.

  6. Did not receive much coverage here but check out Yahoo dealings in China. China is communist, ChiComs think all money is theirs and ChiComs either spend money themselves or they direct banks and companies to build infrastructure for good of Nation.

    If you invest in Chinese firm, you will never know true value from day to day but China not likely to go bankrupt anytime soon so State owned firms should be around for some time yet.

    Business over there is not done remotely like it is here, experts here have no idea what they are talking about. It’s just a few investment guys talking their usual bollocks.

    Alibaba Group Holding Ltd. Chief Executive Officer Jack Ma said he expects to reach an agreement with shareholders Yahoo! Inc. and Softbank Corp. over the spinoff of the company’s Alipay online payment business.

    Yahoo, whose shares have slumped about 15 percent since it disclosed the spinoff last month, is seeking compensation on concern the company’s investment in China would lose value. Alipay was transferred to a Ma company without the approval of Yahoo and Softbank …..

    China denies claim that Communist Party offspring make up 90pc of multi-millionaires ….. A report that relatives of senior Communist Party cadres make up nine out of ten of China’s multi-millionaires has been firmly denied by the Chinese government.

  7. This company sounds quite odd, but having been to Yunnan province and many other parts of China myself, i can attest to the fact that a lot of stuff is decided at the county level. However, what makes the statement from Sino-Forest odd is that they say city level. Their spokesperson may be just using the most granular sounding noun, but the “zhou” or county does have a lot of power. I was fined in the mountain on our way to Kunming and the dodgy little cop said that the area being closed to tourists was a zhou-level decision. Northern parts of Yunnan are can be sparsely populated and there could be anything going on there.