Sino-Forest Shares Plunge 27%

| About: Sino-Forest Corp. (SNOFF)

By David Berman

Now that John Paulson has dumped his holdings of Sino-Forest Corp. [(OTC:SNOFF) 1.99-0.74-27.11%] it appears that other investors are following his lead. The shares of the embattled forestry company fell another 27.1 per cent on Tuesday, bringing the total decline from their highs in March to 92.5 per cent.

To be sure, a recent report from analyst Carson Block of Muddy Waters, alleging that Sino-Forest had overstated the value of its assets, did the most damage to the share price earlier this month. But some risk-averse investors had been holding out in the apparent hope that the company would be vindicated.

They seemed to have an ally in Mr. Paulson, the well-respected hedge fund manager who cemented his reputation by betting against the U.S. market in 2007, making a tidy $15-billion (U.S.) in the process. Until a Canadian regulatory filing on Monday showed that he had sold all of his Sino-Forest shares, he had been the company’s biggest shareholder, with about 34.7 million shares representing a 14 per cent stake.

Sino-Forest management had also made some suggestions recently that Mr. Paulson had been supportive of the company. “We are certainly in conversation with him and others to talk about what is going on and things that we need to be doing and the alternatives that the company could undertake to respond to some of these allegations. It has been friendly, supportive and suggestive discussions,” chief financial officer David Horsley told the Globe and Mail on June 7.

According to the regulatory filing, Mr. Paulson’s stake in Sino-Forest had been reduced to zero by June 17.

Meanwhile, the sole analyst who stood by the company during the early reaction to the Muddy Waters allegations has capitulated. Paul Quinn of RBC Capital Markets suspended coverage on the stock. According to Bloomberg, Mr. Quinn had reaffirmed his “outperform” recommendation and $14 target price on the stock as recently as Monday.

Now, of course, there is the question of who continues to buy these shares at failure-like levels. Some investors are no doubt betting that Sino-Forest will be vindicated after a lengthy investigation into its business operations in China – an optimistic scenario that would send the shares up about 12-fold if they returned to their 200-day moving average.

Already the shares are bouncing a little. After hitting a low of $1.29 on Tuesday, the shares rebounded 54 per cent by the end of the day.