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mikeyu
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An engineer interested in human behavior and thinking.
  • How Oriental Paper Lost Credibility So Quickly 0 comments
    Jul 21, 2010 1:26 AM | about stocks: ONP
     

    To be honest, I didn’t plan to write this blog, but it was just so amusing , especially when I realized many people didn’t see it. They have to see it, to enjoy it.

    For some of  those who are wondering why ONP continues to drop, they probably haven’t realized that Oriental Paper has lost its credibility in round one in an amusing way. How come?

    On June 30, a few days after Muddy Waters published its report, followed by heavy selling in the market, ONP made its first response in the press. Many people’s expectation was high. They had wished ONP to provide evidence that all the allegations were false, item by item, even though it looked difficult because Muddy Waters report contained so many vivid details, more than enough for a writer to put them in a book such as “The Big Short.” Unexpectedly, ONP took a different path. Noticing the English translation Muddy Waters had used for ONP’s Chinese subsidiary (i.e., HBOP) was different from its own translation, ONP simply announced that Muddy Waters report  was about a much smaller company in the same location which had nothing to do with ONP’s Chinese subsidiary. What a relief! The stock price shot up after the announcement but only to fall back within hours. The next morning Muddy Water responded, right on market opening, that the company was the same and provided the Chinese name of the company. The shareholders hit the sell button without waiting further for ONP’s words. And trading volume on the day was about 2.5 millions and reached nearly 6 millions the next day, 1/3 of the shares outstanding or 1/2 of the floating. This was several times of the sum of the heavy volumes in the previous sessions. Apparently ONP lost its credibility. In face of uncertainty, people sold first and asked questions later.

    Why did people sell out before even seeing the final proof or ONP’s admission of any wrong doings? Is this irrational?

    Note that the case is about fraud. The focus is the ONP’s credibility, because it is ONP in which people invest, not Muddy Water. Whatever Muddy Water says about ONP, whatever its motivation is, if ONP can prove it is credible and worth investing, people will still buy its shares.  Although most people didn’t know how to verify by themselves Muddy Water’s claims, ONP’s response that they were talking about two companies just sounded simple for verification. And it even looked smart in the beginning. It was just much easier to verify the existence of a company at certain location than investigating its records on sales, contracts, tax, equipments, transportation etc. On the one hand, if Muddy Water has so much details on those issues, it can’t be wrong on the simple issue on the identity of the company. On the other hand, people will expect ONP to know its local competitors very well. But ONP has not realized this, to get rid of all the complicated and difficult issues of credibility by being clever,  ONP has added more burden to itself.  And more importantly, it  provided an example for people to judge its credibility, and thus simplified the whole issue when  people were unsure what to do. If Muddy Water was inaccurate on this issue, investors had nothing to lose, but if ONP was wrong, its credibility was really in doubt and the downward risk was just too high to bear with.  Therefore, the selling after ONP’s first news release is rational.

    But have people made the right decision by selling? People who sold out or went short asked the question, as well as those who were confused and didn’t know whom to believe, not to mention those who are still long, even those who started a fraud and pretending to ask questions.

    And could you verify Muddy Water’s claims on this issue?

    Actually you can verify this by yourself,  that the company Muddy Water talked about is exactly the ONP’s subsidiary, simply by searching Chinese websites. I have shown steps in my blog (seekingalpha.com/instablog/680860-mikeyu...). The fact is that although ONP and Muddy Water had different English translations for the company, the company’s Chinese name was the same, and more importantly, as well as all the finger prints information that can’t change once the company was registered in China. Using this finger print information, you can uniquely determine the identity of a company, just as a person’s identity.  

    Although you can get enough information to make the final judgment yourself on the simple issue if ONP and Muddy Water are talking about the same company, it is not as satisfactory as ONP making the confession itself, without knowing it, just as a lingerie model happily posing on the show without realizing what is being shown.

    On July 6, ONP released further response  in the press. ONP started to pick on concrete issues in Muddy Water’s report. It also posted the link for its assets and profits forms of its Chinese subsidiary filed with Chinese government, in Chinese.  Meanwhile it still refused to admit that its Chinese subsidiary is the company Muddy Water claims, because they had different (English) names. But this time, nonetheless, it changed its story somewhat.  It didn’t say that the Muddy Water’s company was a much smaller paper mill as in the its first response. It simply said it didn’t know what Muddy Water was talking about. A company’s existence came into being and then was wiped out in a week. You can imagine the expression on the face of its institutional investors. But the best part of it is that ONP didn’t realize that the Chinese name of its Chinese subsidiary is shown on its assets and profits forms in the link it had provided. The Chinese name of the company shown there is the same as the one Muddy Water posted on its website. The lingerie model simply forgot to wear her product for the show before starting her wonderful journey to the center light of the stage.  Enjoy yourself, as it is still on the website.

    Here is the link for ONP assets and profits forms of its Chinese subsidiary filed with Chinese government, in Chinese:

     http://www.prnasia.com/sa/attachment/2010/07/20100706693241.pdf

    It is also in its news release, if you bother:

    finance.yahoo.com/news/Orient-Paper-Furt...

    ONP’s HBOP: 河北省保定市东方造纸有限公司.

     


    Disclosure: short

    Disclosure: short
    Stocks: ONP
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