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Letters & Theses

Muddy Waters Research

Muddy Waters' initiating report on Sino-Forest

Published 2 Jun 2011Short report · Investment

What to notice

  1. 1

    The report alleged that sales routed through unnamed "authorized intermediaries" were a structure for fabricating revenue without the tax invoices auditors rely on.

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Why read it

The model of the modern short report: allegations built from local records, site visits and filings, set out page by page against a company the market treated as established.

About this report

Muddy Waters Research published this 40-page report on 2 June 2011, initiating coverage of Sino-Forest, a timber company listed in Toronto with its operations in China, with a rating of Strong Sell. The first page is a disclaimer; the report opens on page 2.

The report alleged that Sino-Forest had overstated its timber assets and revenue for years. It said the company booked sales through intermediaries it did not name, claimed timber purchases in Yunnan province that exceeded both its holdings and the region's harvesting quotas, and gave its independent valuer manipulated data and access to a small fraction of its forests. It also questioned the board's independence and valued the equity at less than $1 a share, because debt of about $2.1 billion exceeded what it believed creditors could recover. The report set out the research behind these claims: ten people, two months, and more than 10,000 pages of Chinese documents.

Companies

  • Sino-Forest TRE

Themes

  • governance
  • valuation
  • risk

L3VLUP does not host this document. It belongs to Muddy Waters Research; the notes above are L3VLUP’s reading of it.