It is every CFO’s nightmare in the age of the Internet and instant communications.
On June 2, little-known
Muddy Waters Research accused mainland Chinese plantation tree owner Sino-Forest Corporation of overstating the extent of its timber holdings and committing other instances of fraud. Sino-Forest CFO David Horsley and his CEO, Allen Chan, denied the allegations, but investors took fright and drove down the stock price of the Toronto-listed company.
Never mind that Muddy Waters -- its name references a proverb that muddy waters make it easy to catch fish -- is also a short-seller with a strong interest to see the stock price implode. After closing at C$18.21 on June 1, Sino-Forest fell 20% to C$14.46 on June 2. The stock plunged to its lowest level on June 21, when it traded at C$1.99 – down 89% from June 1. Sino-Forest has now recovered somewhat, closing at C$3.20 on June 30, but that’s still far lower than before the Muddy Waters report.
Other companies are getting muddied, too. Hong Kong-listed organic vegetable grower Chaoda Modern Agriculture fell 28% from HK$3.97 on June 1 to HK$2.87 on June 6, while processed-meat supplier China Yurun Group slid 31% from HK$28 on June 22 to HK$19.38 on June 28. Both were rumoured to be the subject of a Muddy Waters report.
Muddy Waters did come out with a report on June 29, but the target was Shanghai-based semiconductor maker Spreadtrum. The company’s depositary receipts listed on Nasdaq fell as much as 34% before clawing back most of their losses to close at US$12.49, down 3.5% for the day. It fully recovered on June 30.
Other players may be joining the game. Allan Matheson, managing director of Hong Kong due diligence firm Blue Umbrella, is seeing a rise in requests for “fishing expeditions” into the financial statements of mainland Chinese enterprises. But, he says, “most of the companies we’ve researched ultimately receive the green light from our clients.”
China Syndrome
What’s going on? Call it the China Syndrome. In recent months,
questions have been raised about the financials of at least 13 mainland companies listed in the US and Hong Kong, among them China Agritech, China MediaExpress Holdings, China Century Dragon Media, China Forestry Holdings, Longtop Financial Technologies and Real Gold Mining. Trading in their shares has been suspended and several companies were delisted.
In this environment, it is easy for a mainland Chinese company to be tarred with the same muddy brush, regardless of how strenuously company officials deny the allegations. Sino-Forest has engaged PricewaterhouseCoopers to conduct an independent review, but nervous investors remain disinclined to give the company the benefit of the doubt.
High-profile hedge fund manager John Paulson is one of them. He has been supportive, CFO Horsley initially told Canada’s The Globe and Mail newspaper. “We are certainly in conversation with him and others to talk about what is going on and things that we need to be doing and the alternatives that the company could undertake to respond to some of these allegations.”
But by June 17, Paulson’s various funds had completely disposed of their combined 34.7 million Sino-Forest shares, equivalent to 14% of the company. “We believe significant uncertainties exist,” Paulson told his investors in a letter. “Even if Sino-Forest’s special committee investigation clears management and supports the public disclosures and financial statements, the stock may remain depressed for an extended period of time.” A Canadian regulator, the Ontario Securities Commission, has launched a probe of Sino-Forest.
2012, May 18 
0 comments
Print
Digg