Investor Concerns Hunt Sino-Forest

Chinese tree plantation operator Sino-Forest was unable to quell investor concerns about its business operations in a conference call Tuesday, and its stock continues to tumble.


Sino-Forest , which reported a $22.1 million first-quarter loss, warned that fraud allegations leveled against the company by research and investment firm Muddy Waters would continue to affect its business short-term, as the company devotes more resources to fighting the claims. Shares of the Toronto-listed company fell more than 75 percent since Muddy Waters released its report on June 2.

Sino-Forest continues to refute the challenges to its accounting and business practices, and CEO Allen Chan says he personally stands by the company’s numbers. “There are no inaccuracies in our corporate reports, filings or audited financial statements.”

Chan says Muddy Waters’ report “demonstrate a lack of understanding of our business, a lack of review of our financial statement and simply put, sloppy research.”

Sino-Forest has tasked three of its independent directors to examine the allegations. The company says it will take two to three months for the committee to provide a complete report on the findings. PricewaterhouseCoopers has been hired to assist the examination.

Analysts tell CNBC they don’t expect to see any major move changes in the Sino-Forest stock until results of the investigation come out.

“[Sino-Forest] shares face a long road to redemption, but the process is fluid and subject to change as new information becomes known,” Credit Suisse analysts said in a research note Tuesday. The firm maintains its Neutral rating on the company.

Sino-Forest also faces several class action lawsuits in connection with its operations. William Ardell, a lead independent director, said the company has no "adequate knowledge to the size or the extent of any of it,” when asked about the anticipated impact and costs.

The company says it will have to scale back its timberland acquisitions and to divert significant resource toward investigation of Muddy Waters' allegations. “This examination process is going to take a tremendous amount of time, operations people in the field, and so that’s going to impact in the shorter-term our ability to continue on the acquisition pace that we were on for the year,” said company’s CFO David Horsley.

Analysts don’t expect this to significantly affect company’s revenue for 2011.

Meanwhile, short-seller interest in Sino-Forest remains high. According to research firm Data Explorers, 27 percent of the company’s shares are outstanding on loan, representing “almost 90% of the supply of shares that could be borrowed.”

“This means it would be hard to short more of the company,” says Alex Brog of Data Explorers.