Muddy Waters founder Carson Block says he has more ammunition against Sino-Forest, vows to share his findings with regulators
DON MILLS, Ontario
June 7, 2011
– Carson Block has dismissed the initial efforts of Sino-Forest Corp. to defend itself, saying the company has yet to address the bulk of his explosive fraud allegations.
On a heated conference call with analysts, he warned that he has even more ammunition against the company as he further laid out his case for why he alleges it has virtually no value. He promised to share his findings with Canadian regulators as well.
"If this has to be settled by the regulators, then so be it," Mr. Block, the founder of Muddy Waters Research, told his audience. "We're looking forward to working with them. We're confident when all is said and done it's another [China MediaExpress], another [RINO International], only much bigger," he said, naming off other Chinese companies that he exposed.
The conference call came at the end of a memorable day for Sino and its shareholders. The stock soared as much as 63% after the company dumped a pile of documents into an online data room, which it used as evidence that the Muddy Waters allegations are false. Among them was a purchase agreement from 2007 for land in China's Yunnan province, where Muddy Waters claims the company is overstating timber investments by about US$900-million.
The company also provided bank documents to prove that it is holding US$1.26-billion in cash.
However, the hot money did not stick around and Sino shares ended the day up just 16.6%, or 87 , at $6.10. The company has a market value of $1.5-billion, little more than the cash on its balance sheet.
In breaking down Sino's business model, Mr. Block said it is earning a 55% gross margin between tree traders "who don't know each other" and reiterated that its structure -which runs most of its revenue through authorized intermediaries (AI) -is used to fabricate sales transactions, while having an excuse to avoid taxes. He said the AI structure is unnecessary, overly complex and illogical as the AIs accept undue risk.
Mr. Block acknowledged that he moved into the "big leagues" with his move on Sino-Forest, which is much bigger than the other companies he targeted. He said that other people expressed concern about the company but were reluctant to take it on because it is so large.
He recalled looking at Enron when he was a law student, and could not understand why it was reporting strong earnings growth while its free cash flow was "unbelievably negative." He said there has never been one year where Sino was cash flow positive.
For his part, Mr. Block did not make much of the unearthed documents that tried to alleviate concerns about Sino-Forest's timber assets and still believes stated timber revenues are wrong.
Mr. Block told Bloomberg Television that he is still short the stock and plans to stay short until it reaches zero.
His view is that Sino-Forest is a "cancer on the financial system" that continues to burn cash to buy trees vastly ahead of any customer orders. If it could no longer issue securities to support itself, then it would collapse, he said.
A legal fight looks likely, as class-action lawyers circle the company even as it threatens to sue Mr. Block.
The Sino news has divided analysts, who used to be bullish on the stock but have come under fire because of the explosive Muddy Waters allegations. On the call, analysts expressed anger as well as plain curiosity about Mr. Block's research.
One clearly annoyed caller asked him how much time he spent speaking with the company. He said he spent no more than two and a half hours talking with Sino-Forest's investor relations representative during his investigation, much to the disbelief of the caller.
In a note to clients Monday, analyst Paul Quinn of RBC Capital Markets became the latest to come out in support of the company, saying he has visited the company's sites on four separate occasions and has even met with government forestry bureaucrats in China.
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