Tuesday, June 7, 2011

Need to go China to investigate Sino-Forest? (2.)

Look into Sino-Forest's trees in Hunan, China

The two Chinese provinces in which Sino-Forest owns the most standing timbers are Yunnan and Hunan. Muddy Waters has already sent investigators to Yunnan and then displayed tons of findings in its report. Before flying to Hunan or hiring a local investigator there, we may do some cross-checking by just using Internet.

According the Company's 2010 Annual Information Form (2010 AIF), which you can download from http://www.sinoforest.com/pdf/filings/AIF10-Final.pdf, Sino-Forest signed master agreements with Hongjiang City Forestry Technology Integrated Development Services Company (Hongjiang Forestry Services) to acquire approximately 400,000 hectares of non-state owned plantation trees for between RMB10.4 billion to RMB12.5 billion over 14 years in Hunan Province. The plantations under this agreement include mature trees with an estimated yield of 100 to 120 cubic meters per hectare, or an aggregate 40 million to 48 million cubic meters of wood fibre.

When Sino-Forest signed an agreement of intent with the local government in Hunan in 2006 to acquire forests, the Hunan Forestry Bureau put the news on its website http://www.forestry.gov.cn/portal/main/s/72/content-367429.html, which said that Sino-Panel planned to invest RMB 2 billion to acquire 150,000 hectares with 7 million cubic meters of wood fiber.

What differences do we have here?

First, the investment. According to the government news report, RMB2 billion for 150,000 hectares, thus 400,000 hectares should be around RMB5.3 billion, but Sino-Forest's 2010 AIF stated RMB 10.4 to 12.5 billion. Could the government want to shrink the numbers? Unlikely. Foreign investments are a key performance indicator to Chinese officials, the local governments always try to exaggerate the numbers.

Second, the cubic meters of wood fiber. The Forestry Bureau reported 7 million cubic meters on 150,000 hectares, thus 400, 000 hectares should have about 19 million cubic meters of wood fiber, but Sino-Forest said 40 to 48 million cubic meters. I really wish those natural trees could grow so fast during the period from 2006 to 2010.

Where are those forests specifically? The Sino-Forest's 2006 AIF, which you can download it from Sedar, clearly stated 100,000 hectares of the 400,000 hectares under the master agreements were in Hongjiang city, but an article dated on October 14, 2011 on Hunan Forestry Bureau http://www.hnforestry.gov.cn/listinfo.aspx?ID=250124, might challenge these 100, 000 hectares. The article indicated that the total forest area in Hongjiang city was 2,301,600 mu, which equals to 153,440 hectares. The end of article also said that 4 towns were full of bamboos. This means the city agreed to sell almost every tree in the whole Hongjiang city except the bamboos and some trees in peasants' yards to Sino-Forest. The article also mentioned that over 90% of all forests in Hongjiang were rented and operated by peasant households.

The other 300,000 hectares might also be questionable. The 2006 AIF clearly stated that Sino-Forest entered into a master agreement with Hongjiang City Forestry Technology Integrated Development Services Company, a state-owned enterprise, to acquire 300, 000 hectares in cities other than Hongjiang. All state-owned entities in China are controlled by government. If the entity's name started with China, it is controlled by the central government, if the name started with a city, it is controlled by the city, so Hongjiang City Forestry Service is appearently controlled by Hongjiang city. It is very rare that one city's state-owned forestry service company has rights to sell forests in other cities' turf.

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