Sino-Forest Corporation (SNOFF)

[Sibware]

Interesting article from an Investment House long SNOFF

http://seekingalpha.com/instablog/676352-robert-dyas/359991-sino-forest-probably-not-a-fraud

Sino-Forest Probably Not A Fraud

Sino-Forest is one of my firm's top 4 positions. We got in after the MW report and before the Chandler purchase. We solely rely on our own research/thinking and only invest when we have HIGH conviction. Now that is out of the way, a little about why we bought and our current views:

The original MW report contained huge, glaring errors that were immediately apparent. The biggest of these was an apparent total lack of understanding on MW's part between the sale of standing vs. non-standing timber. As the MW report put this front-and-center in their report as evidence of fraud, it was clear that the quality of their "research" was unusually poor. And put forth by a short seller with an agenda. In short, we viewed the risk of fraud as equal before and after the MW report was released.
The stock had fallen from 200% of book to <50% of book, and given timbre inflation dynamics the book (sans fraud) was more likely to be understated than overstated. The value is also likely fairly accessible in the event of a controlled run-off of the business.
Since this time the company has undergone close scrutiny. No evidence of fraud has been found to date (e.g. the cash is there, the contracts are there, the contracts appear valid, etc.). This doesn't guarantee that there isn't any hair, but in our experience fraud is either top-down and pervasive (e.g. Enron, Madoff) or bottom-up and limited. Not finding any fraud at this point virtually guarantees that the top-down and pervasive variety is not in play. Bottom-up and limited can always exist in any company, but generally has limited LT impact.

Given the current state of affairs, we expect that Sino-Forest will either begin trading again sometime in 2012 or be taken private. We expect the price to be in the $8+ range, with upside to $12+ depending upon the results of timber valuation reports.
Disclosure: long Sino-Forest

Disclosure: I am long SNOFF.PK.