In a dark, dark wood

Posted by Joseph Cotterill on Jun 21 11:20. 5 comments | Share

The Globe and Mail on Sino-Forest, June 20:
Its corporate structure has opened Sino-Forest up to criticism that it is too opaque. The company has scores of subsidiaries in China and offshore locations such as the British Virgin Islands. More…

The Globe and Mail on Sino-Forest, June 20:

Its corporate structure has opened Sino-Forest up to criticism that it is too opaque. The company has scores of subsidiaries in China and offshore locations such as the British Virgin Islands. It has refused to disclose the names or locations of the customers who buy its standing timber, saying it doesn’t want to reveal the identity of its customers for competitive reasons…

Sino-Forest on the Globe and Mail, June 20:

The Company would like to remind investors that most domestic and multinational companies with significant China exposure, a country with a rapidly evolving business environment, have structures and operations that are complex and significantly different from the North American environment and that can be complex to explain…

Fitch Ratings on Sino-Forest, June 21 (cutting BB+ to BB-):

The downgrade and RWN are primarily driven by the fact that the company does not currently have direct access to the profits of its main operating subsidiaries due to complexities in its corporate structure. During the Q111 results announcement on 14 June 2011 and follow-up discussions with management, the company indicated that roughly 90% of its plantation fibre sales, which contribute to the bulk of its operating profit, are conducted by British Virgin Island (BVI) registered subsidiaries, which are legally barred from receiving local currency due to their offshore incorporation. However, these BVI subsidiaries are allowed to own forestry assets.

The present payment structure means that the BVI companies do not handle their operating and investment cash flows. The proceeds from the sale of BVI-owned onshore assets are not remitted to the company but are paid directly by SF’s customers to its suppliers. Effectively, this means that the cash flows from these asset sales are not available to the BVI registered companies as they are only capable of being converted into new assets. Whilst the asset base can continue to expand under this model, offshore creditors are at a disadvantage as there is no clear ability for the BVI entities to access the cash flows for debt repayment.

Under this business model, any restriction in access to international capital markets over the medium term is a major concern for Fitch…

Also a concern for those offshore bondholders, who are already positioned behind Sino-Forest’s onshore bank creditors and/or face prospects of little recovery from allegedly over-valued, or non-existent, forestry assets. The company’s offshore 2017 bonds traded at around 47 cents on Monday.

Here’s a Sino-Forest diagram of that BVI business model, incidentally, from its Q1 results investor presentation:

_____________________________

Huaihua City Yuda Wood

But never mind the offshore subsidiaries, how about the onshore ones that might be lying around in dark corner somewhere?

Such as the controversy over Huaihua City Yuda Wood, Ltd.

It’s the subject of a fresh Muddy Waters note on Sino-Forest, published on Monday:

Muddy Waters first described Huaihua Yuda as a ‘significant undisclosed subsidiary’ of Sino-Forest, in its initial report on the company. Nomura’s credit analyst additionally noted this Huaihua City Bureau of Commerce website page, which referred to Yuda as Sino-Forest’s subsdiary.

The page appears not to be loading properly as of Tuesday:

Sino-Forest pushed back by posting a letter from Yuda itself to the Huaihua City government, asserting that it’s not a subsidiary and for the website to be corrected. It appears to have been simply removed. However, the Globe and Mail’s weekend report into Sino-Forest’s Chinese operations saw evidence from workers that Yuda was a “cousin company” after all.

Now Muddy Waters has taken interest in the company of which Yuda did claim to be a subsidiary — Sonic Jita Engineering Ltd.

In fact Sino-Forest owned (via two Sino-Wood subsidiaries), and transacted with, Sonic Jita as far back as the late 1990s, Muddy Waters says, noting that the transaction was not disclosed as an operation with a subsidiary.

There then follows what you could call evidence of the Chinese ‘rapidly evolving business environment’:

TRE acquired its stake in Sonic Jita from TRE co-founder K.K. Poon, ADS Capital Ltd., and Leslie Chan, who was then a major shareholder and executive vice president of TRE as well as a co-founder of Sino-Wood Partners Ltd. (we are unclear whether there is a familial relationship between Allen Chan and Leslie Chan). Allen Chan was a director of Sonic Jita at the time TRE acquired Sonic Jita. It was never disclosed that TRE’s management individually owned and controlled Sonic Jita.

Sonic Jita is presently owned by parties who appear unrelated to TRE.

However, Sonic Jita appears to share at least one key executive with TRE, Mr. Ye Han Xiang. It is unclear at this point whether Mr. Ye concurrently holds a position at Sonic Jita. Mr. Ye is the Legal Representative of four TRE entities, including one of TRE’s acknowledged Huaihua companies, Sino-Panel (Yuan Ling) Co. Ltd…

Muddy Waters has posted screenshots of two websites that show Ye’s ties to Sonic Jita (the first pic) and Sino-Panel (the second):

The first website wasn’t loading when we tried, but the second is there (though it’s slow-loading).

And who says this stuff is opaque?

Related links:
Sino-Forest coverage – FT Alphaville
Sino-Forest coverage – FT Tilt
In a dark, dark wood – Jack O’Lanterns
BVI offshore companies – BVI Offshore

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