Sunday, June 12, 2011

Sino Forests – some thoughts

A bit over twenty years ago I spent a pleasant afternoon in the lock-up at Eden Police Station on the South Coast of New South Wales.

I was arrested at a protest into logging of native forests, cuffed, put into the paddy-wagon and left in a cell for about six hours, fingerprinted and released. The charges (obstruction) were later dropped. I was not obstructing anything...

What made this pleasant was the company. I was arrested as bystander at an “artists for forests” protest and in the lock-up with me were some of Australia's most famous artists.

The lock-up itself was a brick courtyard open to the sky except for bars that blocked an unlikely escape up the walls. Attached were two austere cells only one of which had a door. There was a toilet (no privacy) and a vinyl mattress and a total absence of hanging points. The other cell was firmly locked but if you peered through the feeding-slot there were a couple of tonnes of marijuana being kept as evidence after a huge local drug bust.

Supporters threw two dozen boxes of coloured chalk through the bars in the roof and for the next four hours I watched artists at work. Given the heady prices of Australian modern art these days the walls of this cell were probably worth seven figures by the end of the day – until the police hosed the work off.

I tell this story only to relate that during my early twenties I was an organiser for several anti-logging protests and I developed amongst other things a reasonable perception of the scale of a million tonne per annum fibre operation.

I never thought I would use that – and then along comes Sino Forests. Oh how I am enjoying this.

You see below – as a blast-from-my-past - an aerial photo of the woodchip mill in Eden. This was and remains a controversial beast. It is also pretty darn large. The docking station is so the bulk-carriers can dock and transport Australia's native forests away. [No doubting which side of the controversy I am on...]

This chip-mill processes almost precisely a million tonnes per annum in wood-chips. Given wood and water are roughly the same density it is roughly a million cubic meters per annum.

I say that so you get a picture of scale.

According to Sino Forest they sold – get this – 17 million cubic meters of wood last year and they expect that number to grow in the foreseeable future. Some of this they processed themselves – other wood they sold as standing timber. Obviously however when you sell it as standing timber someone else has to process it.

So lurking around Sino Forest's land are 17 mills this size (or one mill 17 times this size of some variant thereon).  And that is presuming there are no other producers in the area other than Sino Forests. Sino has promised to take analysts and investors to see their operations. I make a suggestion: get them to take you to all the chip-mills that process their timber and stand there with a clicker counting the trucks in. [E&Y - the auditors - should do this pronto. The longer they delay the more their potential liability.]

I have my doubts. I had a number in my head for the size of the global pulp (for paper) industry: something just under 200 million tonnes per annum. 17 million tonnes per annum of fibre seemed large.

Wikipedia cites the global pulp market in 2006 as 160 million cubic meters. Paper is not much of a growth industry these days as anyone looking at newspaper circulation can attest – so I figure that is not far from the current number. There are other uses of fibre (cement form-work being the big one in China) but one bullish article is hoping for growth in total usage to 223 million tonnes per annum by 2015. Whatever – Sino Forest was claiming to be a high-single-digit percentage of global supply – and they were (implausibly) claiming it from 787,700 managed hectares.

When I read the Muddy Waters report something else jarred. Muddy Waters you see was using a different measure of the scale of the industry in China. They were quoting numbers like 420 million cubic meters of wood per annum in 2010 of which 240 million cubic meters was for industrial use (namely paper, cement formwork and packaging etc).  China is a big place – but these numbers seemed a bit big to me especially as the majority of feedstock for industrial uses of wood-fibre is recycled material.

So I went looking for the source of the numbers. Here are some graphs from Sino Forest's annual report and they reveal the source of all the Chinese numbers:

The source is listed at the bottom of each graph as BOABC.

BOABC turns out to be an agricultural consultancy in China. They have a website. It offers reports on various industries but put your email in the box and try and get the grains report. It bounced me.

So what is this funny consultancy whose web-site does not do what it is meant to? According to its website is China's leading agriculture and food business consulting company. Also according to its website it is a subsidiary of Xinhua Finance. That is a name that should ring bells. The principal of Xinhua was indicted recently for fraud (and plead not-guilty) and lots of famous investors lost money. Xinhua collapsed. The stories about Loretta Freddy Bush are colourful.

Xinhua may be dead. Its subsidiary (probably not the most reputable source) is alive though and pumping out numbers which do not match generally accepted industry numbers and which are used to bolster Sino Forestry's stock. And Bay Street analysts are blindly using them. Even Carson Block – who is more than passingly cynical about numbers, accounts and Chinese companies used these numbers without question in his report.

The analysts I suspect went to good schools, Harvard, Yale and the like. I wasted my youth organising environmental protests in remote locations and learned that it was stupid to take at face value official statistics about rape-and-pillage forestry operations. The stats were as often as not lies. Learning about how people lie with numbers was – at least for a stock analyst – a darn good education.

To the Wall Street analysts who take these numbers at face value I got a song for you:



Anonymous said...

"I'll tip my hat to the old John Hempton,
Take a bow for the new revelation"?

gregory said...

nice writing, nice tone and pacing .. and a good bs detector

SinoForestAnalyst said...

Great post John. I was in awe of the Muddy Waters report (borrowing your words) yet I'm in awe of your post and the additional information it provides.

A prevalent theme I'm finding with Sino Forest is "too good to be true". This suggests that Sino Forest is either the Google/Microsoft (of the past) of the Timber industry or a ponzi scheme.

I've bet on the latter as I'm short the stock, and may increase the position substantially.

I've been keeping an open mind and am willing to go long if the facts and arguments for being long are compelling. They've been disappointing, to put it mildly.

John Short ad sinorazum said...

According to James May, the sale of standing timber contract in Yjnnan has an additional clausule in the contract, the mandatory harvest of the trees in 18 months. Given that this seems to impply 50.000 trucks in 18 months, the sale of the standing timber seems unlikely to appeal to common sense as to why the buyer bought so much standing timber.

Alex Dalmady said...

Hi John,
Great post. Also Saw you quoted extensively in latest Economist. Nice.
At this point Ernst & Young knows if they have been duped or not. They just can't say much either way because of liability issues.

Anonymous said...

Great information.

Sell side anaylsts aren't paid to be skeptics, $40m in underwriting fees that were generated from sino-forest since 2007, means they were paid for "buy" reports.

Amused that the likes of HF managers like John Paulson, got pulled into a name like this. Greed is indeed good.

Jeffrey Rothstein said...

Have you looked at iResearch, the tech/media/internet industry research firm cited by both Youku and TuDou in its regulatory filings?

They both English and Mandarin sites, but it appears they publish research in Mandarin and issue news releases thereof, but do not cross-post to their English-language site.

This seems a bit suspect to me for a firm trying to establish itself as the de facto source of such information...

Anonymous said...


Great as usual. Do you know anything about Equititrust?

Anonymous said...

All probably BS. Trying to get your 10 minutes of fame on some view of this stupid contraversy, on quotes? If you talk facts, prove everything, don't make a big story. Real facts are what I rely upon and so should investors. But markets these days rely on theater. Thefore always keep your ears up, and basically we cant trust any business anymore, just seldom news. Eyes and ears open, finger on sell all times!

No, I do not invest on this company or have ever invested in it. Just following the theater.

Anonymous said...

If you want some background on the Equititrust Disaster read this thread..

Anonymous said...

John, love your latest blog - you are becoming mandatory reading for me (and I suspect a lot of journos) and I 'get' your humour. On posting a song for our highly educated and paid auditors - perhaps this one is better?

Detlef Guertler said...

I wouldn't be so harsh with BOABC, John. I guess they don't produce the data themselves but just assemble them from different (more or less official) sources. One example for that (I just found it googling in English) are numbers for wooden furniture for the first half of 2009 that came from the Chinese National Light Industry Information Centre and seem to be identical with the numbers used in the BOABC chart. Link:

But What do I Know? said...

Great stuff, JH, as usual. . .

Anonymous said...

Your assumption that all timber Sino sells is chipped and processed for fibre is false. Great proportion of the timber is actually used for construction, flooring and furniture. What is not suitable for these applications are chipped and used to make fibre. While I do believe that Sino is a freud, I just wanted to point out that you have clearly shown your lack of knowledge in forestry. You should have kept your mouth shut. By opening it, you left no doubt about your ignorance.

Jonathan K said...

Speaking of too-good-to-be-true numbers, what is your take on the recently filed UTA 10k. Very hard to believe, especially given the no-name auditor. On the flip side, traffic as measured by Alexa is trending up.
Any comments?

Anonymous said...

Just for the record, the FAO said total Chinese wood harvest in 2005 was 250 Million cubic meters. So the Sino Forest numbers do not look that absurd in that context. and does not make this post look so bright

Anonymous said...

Mr Hempton has offered less than most enthusiasts may think. There likely is some fraud but probably not enough for the stock to drop to nothing. This development really requires accounting forensics to get to the truth and not Hempton's musings about his logging protests so many ages ago. I wouldn't bet one way or the other based on this drivel.

Sinoforestanalyst said...

Reports $0.08 loss per share on expectation of $0.18 earnings per share. Does not provide much in additional supporting arguments/facts against Muddy Waters claims.

Not looking good for Sino Forest. Following an eerily similar script to other chinese reverse mergers...

death to short sellers said...

A Washington DC based think tank released a study titled "Large Scale Forest Acquisition in China" in September 2010. This concerns the efforts of Stora Enso (a Finnish Forestry International) to acquire 100,000 hectares of Eucalyptus plantation in Hepu County, Guangxi Province. This plantations would feed the large paper plant Stora Enso had built. The full report is on the web at:

Many factors jump out reading the report: Acquiring 100,000 hectares is a massive undertaking given the fractured nature of land ownership. It is politically difficult and controversial. It has taken Stora 8 years to assemble its 100,000 hectare feed lot. Ownership is divided between individual farmers who were promised title to the trees they planted on "wasteland" and collectives that own hillsides. Local politicians and other heavyweights have expropriated land to sell without rent or compensation.

In this context, Sino-Forest is claiming to acquire and dispose 200,000 hectares in three months. It is doing so without a Chinese language website, an identifiable base of operations, a staff of business agents to talk to individual farmers owning sub-acre fractional sites, collectives owning small plots, local politicians controlling hillsides, or any of the larger bureaucratic bodies.conflut

dd said...

"Anonymous" above is not correct. SF have clearly said that they sold 17.6million m3 of "fibre". John's original post (presumably a literal) says "wood" once and "fibre" once, but the press release says fibre. So this needs to be compared to the woodpulp market, not the overall timber market.

Anonymous said...

time to cover your short, PWC says it'd be verifying cash balances with the local branches of Sino Forest's bankers.

Muhahaha.....death to short-sellers!

Tom said...

Not true -- "fibre" or "fiber" is being used as a generic term to mean timber or wood quantity and does not mean a specific intermediate or end product such as wood pulp (turned into paper) or wood chips (turned into wood pulp or fiber board, which is not to be confused with the generic term "fiber"). Clear as mud, huh?

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.