Shares of Sino-Forest(Toronto:TRE.TO) went into another tailspin on Tuesday as the Chinese timber plantation operator struggled to fight a short-seller's allegations that its finances are a fraud.
The latest hit came after Moody's Investors Service said it may lower its rating on the company's debt, saying its business model may be hurt even if it demonstrates the allegations from short-seller Muddy Waters are untrue.
Shares in Hong Kong-headquartered, Toronto-listed Sino-Forest closed down 34 percent at C$4.01, having dropped at midday to C$3.67. Its shares are off almost 80 percent since the Muddy Waters report was published last Thursday.
Sino-Forest, which owns timber plantations across China and counts some major North American funds as its investors, has strongly denied allegations by Muddy Waters of problems with its audited accounts and business model.
The Muddy Waters report accused Sino-Forest of overstating its timber investments in China's Yunnan province by $900 million, using fraudulent data to support its plantation ownership claims, and running its revenue through intermediaries to hide the true amount from auditors.
Sino-Forest said it is weighing defamation action against Muddy Waters, a Hong Kong-based short-seller and research firm that has launched similar attacks against a handful of Chinese companies listed in North America.
As a short-seller Muddy Waters profits as the shares fall.
"While Sino-Forest has refuted the bulk of the allegations and has set up an independent committee to investigate them, Moody's is concerned that its financial position and business plan will be negatively affected in the interim, and even if they prove to be unfounded," Moody's analyst Ken Chan said in a statement.
Prices of the Chinese forestry company's bonds have also been hit by the report.
Sino-Forest's annual information form indicates it had about $2 billion in outstanding short- and long-term debt as of Dec. 31, 2010. It said on Monday it had about $1.09 billion in cash and cash equivalents as of March 31, 2011.
GREENHEART SHARES PLUNGE
In a separate regulatory filing, Sino-Forest's Hong Kong-listed subsidiary, Greenheart Group (HKSE:0094.HK), said its operations were not in any way affected by the allegations being made against Sino-Forest.
Still, shares in Greenheart, which resumed trade on Wednesday after being halted on June 3, plunged more than 80 percent to all time low.
Sino-Forest controls more than 63 percent of Greenheart, which operates tree plantations in Suriname and New Zealand, according to regulatory filings.
PWC RETAINED
Sino-Forest launched a counter-attack on Monday, saying it would release documents to prove its ownership claims, and it announced PricewaterhouseCoopers has been hired to help a committee of independent directors probe the allegations.
"PwC is highly familiar with the forestry industry and the business environment in China," Sino-Forest said, adding that the accounting firm will start work immediately.
Ernst & Young remains in its role as the company's auditor, according to a spokeswoman, who declined to comment further on Sino-Forest's review of the allegations.
The company is still getting support from analysts who had recommended its shares before the Muddy Waters broadside.
Dundee Securities analyst Richard Kelertas said on a call with investors that he believes that Sino-Forest can clear itself of all the allegations.
"We have found out through sources that Muddy Waters pre-marketed this smoking-gun report on Sino-Forest to hedge funds over the last five weeks," said Kelertas, who did not identify his sources.
Kelertas could not be reached for further comment on Tuesday.
Muddy Waters was not immediately available to comment.
Raymond James analyst Daryl Swetlishoff said the Sino-Forest move to appoint PwC is a good choice.
"We continue to have our target and rating under review, pending the release of the finding of the committee of independent directors, and we expect Sino and Muddy Waters to continue to compete for investor support," he wrote in a note to clients.
RBC Capital Markets said the allegations raised the risk surrounding Sino-Forest, but analyst Paul Quinn largely panned a conference call Muddy Waters founder Carson Block held late on Monday.
"No new evidence was brought forward, although Mr. Block claimed to have 'a lot of other material' that he intends to distribute in time," Quinn wrote in a report. "We suspect that we haven't heard the last from Muddy."
Quinn said Sino-Forest must do a better job of answering Muddy Waters' allegations related to its use of "authorized intermediaries" when buying and selling trees for plywood and pulp production.
