August 22, 2011 / 2:13 PM / 7 years ago

CORRECTED-UPDATE 5-Sino-Forest delays internal review

(In Aug. 15 story, corrects to remove reference to year 2012 in paragraph 23)

* Needs more time to complete review of fraud allegations

* Non-cash gain boosts second-quarter results

* To repay $87.7 million in senior notes Aug. 17

* Shares end down 8.4 pct on TSX (Recasts, updates shares, adds comment)

By Euan Rocha

TORONTO, Aug 15 (Reuters) - Chinese forestry firm Sino-Forest TRE.TO said the results of an internal review of fraud allegations had been delayed until the end of this year, sending its shares tumbling more than 8 percent.

Sino-Forest said its independent board members would make no further comments until they completed the review, originally expected by mid-September.

“The independent committee believes it would be premature to provide any further updates, due to the breadth and generality of many of the allegations and their interrelated natures,” Sino-Forest said in a statement on Monday.

The company, its market value slashed after short-seller Carson Block of the Muddy Waters research firm accused it of fraud, also posted a more than doubling of its second-quarter profit, thanks largely to a non-cash one-time gain.

“It’s a matter of trust and it’s a matter of transparency,” said Ben Kwong, chief operating officer of KGI Asia Ltd in Hong Kong.

“It’s the responsibility of management to fulfill what investors need. Failure to do so means further dampening investor confidence in the company.”

Sino-Forest, which offered no quarterly conference call, said it would share a summary of the final report once it was ready and announce all actions to be taken as a result of any recommendations.

The committee gave its first interim report to the company’s board on Aug. 11 and is expected to provide a further update in the next six to eight weeks, Sino-Forest said. The review is taking longer because of the decentralization of data necessary for the completion of the review, it added.


Sino-Forest said its second-quarter results included a non-cash gain of about $469.5 million to account for the fair value of financial instruments.

That gain meant net income in the period to June 30 rose to $447.1 million, or $1.64 a share, up from a year-ago profit of $199 million, or 77 cents a share.

Excluding the non-cash gain, the company reported a loss of $9.8 million. That compared with an adjusted year-ago profit of $60.8 million.

Quarterly revenue was up 6 percent at $317.4 million.

In a note to clients, BMO Capital Markets analyst Stephen Atkinson said the results were hurt by charges related to the internal investigation and weaker profit margins.

Sino-Forest has retained law firms in Canada, Hong Kong and in mainland China to work with the independent committee. It has also hired accounting firm PricewaterhouseCoopers to assist with the review. The Ontario Securities Commission (OSC) is also investigating the matter.

“Our company has been significantly impacted by the allegations made by Muddy Waters and the second quarter of 2011 was further impacted by management’s focus on dealing with the allegations,” Chief Executive Allen Chan said in a statement.

“We expect this will continue to be the case as the independent committee’s review and the investigation of the OSC proceed. However, we believe that we will be able to overcome this difficult situation in due course,” he added.

The company also noted that the Chinese government’s recent moves to raise interest rates had affected the Chinese housing market and resulted in the easing of log prices. Sino-Forest said it expects prices to recover in the latter part of 2011, or in the first quarter of 2012.

Sino-Forest shares closed down 8.4 percent at C$6.87 on the Toronto Stock Exchange, after rising as high as C$7.38 earlier in the session. The shares are down more than 60 percent since the beginning of June, when Muddy Waters released its report on Sino-Forest.

The shares, which plunged as low as C$1.29 in mid-June, have pared some of their losses as large fund managers such as Singapore-based Mandolin Fund and Boston-based Wellington Management Co decided to buy in. [ID:nN1E7740BO]


The company said it plans to repay $87.7 million in senior notes that come due shortly. The 2011 notes, listed on the Singapore Exchange Securities Trading Ltd, will be canceled and de-listed after the repayment.

Sino-Forest plans to repay both the outstanding balance on the 9.125 percent guaranteed senior notes due 2011, along with accrued interest on Aug. 17.

According to its annual Information form for the year-ended Dec. 31, 2010, Sino-Forest had outstanding short- and long-term debt of about $2.07 billion.

Beyond the $87.7 million being repaid later this month, Sino-Forest has no further long-term debt due this year. It does have roughly $345 million in long-term debt that comes due in 2013, along with another $424.5 million that matures over 2014 and 2015, according to the company’s 2010 annual report.

Sino-Forest has about $590 million in bank indebtedness, accounts payable and interest obligations that also need to get paid through the course of 2011, according to its 2010 annual report. As of Dec. 31, 2010, the company was holding cash and cash equivalents of about $1.22 billion.

In its statement on Monday, the company said its cash and cash equivalents stood at $899 million as of June 30.

$1=$0.98 Canadian Additional reporting by Donny Kwok in HONG KONG; editing by Janet Guttsman, Rob Wilson and Lincoln Feast

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