June 9, 2011 / 10:40 PM / 7 years ago

Analysts rise to defense of beleaguered Sino-Forest

* Analysts slam short-seller’s research on Sino-Forest

* Many have had “buy” ratings on the forestry company

* Dundee’s Kelertas among the most vocal Sino defenders

* Sino mostly low key in its response to accusations

TORONTO, June 9 (Reuters) - Allegations of fraud against Sino-Forest TRE.TO have set off a battle royal between analysts who have long supported the Chinese forestry company and the short-seller whose recent accusations have pummeled its shares. [ID:nN03131872] [ID:nN08210464]

Sino-Forest denies the allegations by Hong Kong investor Carson Block, but its response has seemed mostly low key compared with the reaction of some analysts who have attacked Block and the tactics of his Muddy Waters one-man research firm.

At times it seems like the analysts — many of whom had “buy” ratings on the stock — are themselves on the defensive.

Perhaps the most vocal of the Muddy Waters critics has been Dundee Securities analyst Richard Kelertas, who has taken strenuous objection to Block’s accusations. On a conference call earlier this week, the analyst slammed the short-seller’s report as a “pile of crap.”

“Muddy Waters has been using fraudulent means to find information through Chinese sources, to come up with an overblown fraudulent story, to benefit from shorting the stock,” Kelertas said on the call.

Dundee is not the only brokerage to go to bat for Sino-Forest. RBC Capital Markets, Raymond James and others have pointed out discrepancies in the Muddy Waters research.

Even as the company itself has chosen to keep a low profile, perhaps on advice of legal counsel, the strong response from some analysts is not that puzzling, observers say.

“Everybody is going to look like complete idiots if the Muddy Waters report is correct,” said Barry Schwartz a portfolio manager at Baskin Financial Services in Toronto.

“It’s going to be a big egg on the face of many top brokerage firms in Canada, who have committed to giving Sino-Forest strong ‘buys’ for years and assisted with the company’s financings.”

According to StarMine, Sino-Forest had 4 “strong buy” ratings, 5 “buy” ratings and 1 “hold” rating on it, before the Muddy Waters report was published a week ago. Most analysts still support Sino, but have put their ratings on the company under review.

Block, who claims Sino-Forest has fraudulently overstated the size of its forestry assets, declined to comment on the Kelertas statements.

Block typically takes short positions on the companies he writes about — essentially bets that the share price will decline — and then profits from the stock’s subsequent swoon when his research is published. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

ANALYSIS on Muddy Waters and short calls[ID:nN06189802]

SPECIAL REPORT on Muddy Waters [ID:nN06271838]

Graphic of Muddy Waters’ impact:

http:/r.reuters.com/hez89r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The Dundee analyst slammed Muddy Waters for “pre-shopping” its smoking gun report to hedge funds weeks before going public with the allegations. He also panned rating agency Moody’s, which has said it might lower its rating on the forest plantation operator.

“How can you come out because of a Muddy Waters research report and put a company under review after you did a review just a little while ago?” he asked. “What does that say of your own analysis and due diligence of the company?”

Even as he sought to debunk Block’s report, Kelertas himself has put his own rating on Sino-Forest shares under review.


Oddly, while analysts have come out strongly in defense of the company, its own executives have remained for the most part invisible and silent. Even as shares of the beleaguered Toronto-listed company continue to see-saw the company appears to have done little to reassure markets.

Its only response last week, while its shares were tanking, was a weak protest that did little to quell investor panic.

A stronger statement on Monday restored some confidence, but the shares have bounced up and down since then. Sino’s management team has remained largely in the shadows and appears reluctant to go on the offensive.

“I would have thought that the company would be much more aggressive in defending themselves,” said Schwartz.


The company got another vote of confidence on Thursday from Standard & Poor’s. The rating agency said it believes it is too early to assess the implications of the recent accounting and fraud allegations against Sino until verification by independent parties is available.

The rating agency said that, for now, the company’s liquidity is adequate and it does not foresee any short-term refinancing risks.

While more clarity and details may emerge when Sino-Forest reports quarterly results on June 14, Credit Suisse analyst Andrew Kuske wrote in a research note that Sino’s shares likely face a long road to redemption.

Even if the company does manage to address all of the allegations against it, following a review by a three member committee of independent directors, its shares — which are down about 80 percent from their 52-week high — are unlikely to fully recover, at least one analyst thinks.

“The horse has left the barn,” said independent analyst Chris Damas. “They can pick up the pieces, but they can’t put Humpty Dumpty back together again.” (Reporting by Euan Rocha, Claire Sibonney and Allan Dowd; Editing by Frank McGurty and Rob Wilson)

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