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Muddy Waters Issues Sino-Forest Conference Call Response
Muddy Waters has just distriubuted the following release with its take home notes on the just completed Sino-Forest conference call, the stock of which as of this moment is the single biggest loser ever held by Paulson & Co. As can be expected, MW's commentary is not pretty...
From Muddy Waters:
The selloff in TRE shares following this morning’s call illustrates our overall feelings about management’s responses to questions. The highlights are:
- Ernst & Young has been unable to complete its review of TRE’s Q1 numbers.
- Chairman / CEO Allen Chan personally guarantees that TRE has disclosed all related party transactions. However at no time did management address TRE’s relationship with Lei Guangyu, the only disclosed AI. Mr. Chan stated that Mr. Lei is a major AI.
- TRE’s suppliers (agents) and buyers (AIs) are two different parties. As shown by our analysis of five suppliers, none of which were capable of selling nearly the volume of timber TRE claims, TRE had made this point clearly before.
- TRE added an odd twist to its disclosed business model. AIs now apparently do not pay TRE directly (see our discussion of the various problems in doing so). Rather they pay TRE indirectly by paying TRE’s “designated purchasing agents”, which then purchase more parcels. As we wrote in our initial report, a consistent theme of TRE’s stated business practices is that they are unnecessary, overly complicated, and risky for a legitimate business. Is the designated purchasing agent an AI-squared? We look forward to more detail on this new facet so that we can analyze the legal and practical issues.
- Mr. Chan explained that the AI model came into being because TRE could not form WFOEs in the 1990s to conduct this business. As we pointed out in our report, after TRE’s EJV with the Leizhou Forestry Bureau terminated (due to TRE’s failure to contribute its capital), TRE had a WFOE that had a business scope that permitted it to do business directly. Aside from that point, management did not explain why it continues to use an AI model today. Thus the AI model makes no more sense now than it did before this explanation.
- TRE still refuses to disclose its AIs’ identities for “competitive reasons.” It cited an example from the 1990s when an AI’s identity was disclosed, and then smaller competitors undercut TRE’s prices and won business. This explanation strikes us once again as TRE relying on everybody in the chain (e.g., the farmers) being ignorant.
- We do not dispute that TRE’s AIs are overpaying TRE (allowing TRE a 55% gross margin on standing timber). However, TRE’s AIs would be among the largest buyers of timber in China – we do not understand how revealing their identities could subject them to any greater information about the extent of this overpayment than they are currently in a position to receive.
- It will apparently take PWC two to three months to complete its investigation. In our experience with much smaller frauds / companies, this is an aggressive timeline.
- CFO David Horsley stated that TRE can not confirm whether the AIs actually make TRE’s tax payments. He said they “just don’t know” whether the payments are made. Again, the AI model is unnecessary, overly complicated, and risky for a legitimate business.
- Allen Chan did not answer a question about how much replanting TRE did in the quarter, other than to say that TRE is progressing with the program. He later responded to a question about whether TRE is in compliance with PRC replanting regulations by stating that TRE would have heard from the authorities if it were not.
- We believe that investors underappreciate the replanting metric (or lack thereof). China has in the past experienced devastating floods due to harvesting without sufficient replanting. If TRE were not fulfilling its obligations to replant, this would complicate the ability of either TRE or its AIs to obtain harvesting permits for the standing timber.
- Management stated something to the effect that it could remit its cash out of China by closing or selling the BVI entities, and then remitting the cash. This was not a confident or clear explanation, and it raises more questions than it answers. Along those lines, when TRE was asked to clarify this statement during the Q&A, nobody answered and the questioner was mysteriously dropped.
- TRE had some notable blocks / drops of other awkward questions. TRE cut off the Nomura analyst Anissa Lee rather than answering her question asking for more details on where the cash balances are kept. Management also failed to attempt to answer a question about whether its banks are uncomfortable with extending credit. Instead of answering, there was a death ray type of sound toward the end of the question, and the questioner was no longer there. In true memory hole fashion, management moved onto the next questioner without making any statement in response to the question.
- William Ardell stated that PWC is going to check balances in every PRC bank account at the branch level. As LFT, CCME, and other frauds show us, such confirmation should also take place at the central level of the banks – branches are easily corrupted.
- Regarding the dearth of information in the data room, Allen Chan said that he would have to check with “our people” about putting more information online. We advise investors to take note of this delay.
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Chinese fraud? Perish the thought ....
Who sold Paulson on this investment? My dogs could have done better dd, and they can't even read Mandarin.
Bud Fox.
My my that sure is alota bullet points for a simple case of "ChinaFraud"...
Well this is bullish... right?
Just a soft patch.
All things are bullish in a centrally planned economy. No problem is too large and no lie is too big.
The people are able to bitch and moan via all manner of social media. So, there is no need for them to actually do anything about, well, anything. Look at me!!! I'm on Facebook, I'm on You Tube!!! I replied to a post on ZeroHedge!!!
I believe Obama should run with this slogan;
"Nine percent and quite content"
Oh, so its all cleared up then.
Anybody -- what was the name of the fund that shorts Chinese fraud companies? (I can't remember.) They were already killing it for the year when TD reported on them last month. I think I want some of that.
Thanks.
Anybody -- what was the name of the fund that shorts Chinese fraud companies? (I can't remember.) They were already killing it for the year when TD reported on them last month. I think I want some of that.
Thanks.
Me Chinese, me play joke.....
classic
If Paulson had stuck to gold he would be in better shape right now.
If a conference call takes place where no tree in a forest is involved, did it really take place ?
+10 LOL!
Can't see the forest for the trees...
Paulson crying in his beer?
You're breaking my heart.
No question about how many shares management has bought for personal accounts since the story broke?
Such a rigged Q&A. No one from the buyside, just all the cocksucking sell side analysts (ok except for the Nomura analyst, but she was rudely cut off)
If Carson Block, who founded the hedge-fund research firm, Muddy Waters, is right (listen to link below), then the Chinese economy isn't as fraud-free as many like to think it is. The irony in this is that he is betting big time against Sino-Forest, the Chinese-based company that the billionaire hedge-funder John Paulson is heavily invested in. I'm not one to engage in schadenfreude, but I would take great pleasure in seeing the man, who was able to amass more wealth than anyone else by betting big time against the subprime market, take a nontrivial haircut for a change.
http://www.bloomberg.com/video/70530586/
Perhaps I'm wrong, but I doubt that Carson Block is doing anything illegal by shorting Sino-Forest. And as far as I can tell, there's nothing illegal about him making claims that this Chinese-based company is engaging in a Ponzi scheme of sorts. Just think, if we had an outspoken short seller like Carson Block around to inform us that many players in the mortgage market were engaging in a Ponzi scheme, the housing bubble wouldn't have grown to the size that it did, nor would the fallout from it been as great.
Let me close by saying that the Chinese are known for being brilliant at copycatting America. But if they are trying to copycat the great American Ponzi scheme, masterminded by the likes of Goldman Sachs, then look to see the entire global economy crash and burn in the not-so-distant future.
Transparency is a Transitory Problem that Corporations will have to suffer for a good lil while longer than they would like, given todays markets and where the markets are traveling after today.
I wish Paulson no bad luck.. but this is a cluster fuck and how do you buy common shares and back the bonds as well with NO FUCKING TRANSPARENCY?
If I shit out $100's of Millions.. let alone multiples of Billions.. I want to know everything in real time. But that is the difference between someone who invests Other People Monies and someone who consults on where their own monies are being invested.
From a risk persepctive.. this deal was packaged as an insiders (China Gov.) Land Lease / Timber Lease / Sale of Land. Given Paulson's inability to own an Majority out right.. but the ability to invest a lions share for a lions share return..
No replanting? how does that play well? in any public arena?
at the end of the day one can only realize that this was supposed to be a slam dunk insider deal that blew up.. becuase no one cared enough to keep a finger on the pulse of the deal and! the public aspect of it blowing up in a World Friendly to Green Peace (who ever) Press Releases.
Good Work by Muddy Waters!!
What's $500 million to JP and LP's in the grand scheme?
It's reputation that is getting killed. I bet somebody doesn't work there anymore.
I bet you no one has been fired, yet. JP is way too smart to fire the analyst now, even if he was dead wrong. He won't be fired, if he was wrong, until JP has unloaded all his shares at the best possible price, and is actually short the situation.
I bet Mr. Chan would like to plant explosives on a bridge over "Muddy Waters".
Muddy Waters is no hero.
http://agreements.realdealdocs.com/Press-Release/Audit-Committee-of-the-...
He ruined the reputation of ONP and caused severe losses for sharholders. The above report found no wrong doing.
Alway's happy to see Paulson take it straight up the ol' didgeridoo, but Block and Muddy Waters are scum bag manipulators.
They've destroyed good companies with the same inuuendo, false accusations and horseshit. Some they happened to be right, some they didn't. How is this some kind of justice? Because some little rat fuck figured out a way to manipulate the market for personal gain?
I love this blog, arguably the best around but the little circle jerk that takes place on this board with stories like this is pretty weak.
It's all transitory, from Paulson's account into another.
Eat shit and die you bloodsucking prick.
The fact that Sino Forest needs two to three fucking months to respond to the report tells me everything i need to know. It should take the CFO and CEO less than 15 minutes to respond and completely discredit muddy waters.
+1 it has been truly disappointing that neither the company, nor the analysts who cover them, nor of course the rating agencies, have an immediate response that rips apart the Muddy Waters report line by line. You would think someone at management or one of the analysts could dissect the report quickly and show what was wrong with it, if there was anything?
That 3 months window sounds pathetic.
I'm not as surprised that JP hasn't responded. If he believes he is correct he won't respond until everyone else is super short and he can inflict maximum damage. If he is wrong, he is busy unloading shares hand over first but probably not willing to take the legal risk of defending the position while dumping the shares and bonds.
http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwis...
TRE will be a good takeover target if they can keep the operation together.
The supply side might walk and make contracts with the competitor.
At this time, my recommendation would be to sit back, watch and enjoy the show.
Last time this happened, geologists fell out of helicopters (BRE-X)..
One thing not mentioned above, is the costs of acquiring new stands of timber to supply ongoing business (re-planting??? Who is kidding who?? Reforestation in China is a nasty joke and fraud. See Nature science journal referencing satellite photos showing NO NET reforestation in China since the 1990's). Maybe Sino-F is fairly straight for a Chinese company but that doesn't mean it can't get its tits in a wringer. How much has it been paying for acquisitions of new timber lots? If Sino-F is anything like Chinese property (housing) developers, then it has been paying high(bloated) market price for new timber stands (if it really has been buying any). Eventually, the pulp prices drop>=Company blows up, hung on its leveraged acquisitions. I'd short the hell out of it myself if I had the wherewithal, it is a low flying wing shot goose just waiting to be bagged.
It is kind of fun to see Paulson pole axed, but actually I am jealous, I wanted so badly, to get in on the BIG SHORT myself. I could feel Lehman slipping but .....I was a chicken and didn't trust my own research. Well... I am a big Chanos fan too. Paulson will weasel out of this, somehow. Darn.