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The stock market has been changing rapidly and successful investors need to be able to quickly sort through and understand large quantities of data. I aim to discuss relevant and up-to-date stock news and analysis to help investors make more informed decisions. I take long and short positions in... More
  • Orient Paper Inc: A misunderstood company 8 comments
    Jul 28, 2010 10:02 PM | about stocks: ONP

    Orient Paper Inc. ONP has been extremely volatile the past few weeks starting with the initial allegations by Muddywaters at the beginning of July 2010.  To prove the allegations are baseless, ONP management have released reams of documents and data and followed up with investor and analyst at a conference call and a meeting.  Curiously, Muddywaters did not participate in the conference call or the meeting where all of their allegations were disproved in details.   Since then, a few other short sellers decided to jump on the bandwagon to distort and talk down the stock for their personal gains.  As the result, ONP’s stock price has fluctuated wildly with investors becoming super skittish, not knowing what to believe.

    In the morning of Wed 7/28/2010, Theflyonthewall website posted that Roth Capital decided to suspend its rating on Orient Paper pending the results of the company's announced independent third party investigation.  As  investors have already been super skittish, the news promptly caused the stock to drop down by more than 20% before recovering somewhat at the close.  Let’s analyze to see how significant the announcement by Roth Capital is and how it should affect the stock price.

    First, Roth Capital’s announcement is understandable since investment banking firms in general do not want to deal with companies tainted with controversies, regardless of whether the controversies are valid or not.  It is likely their policy that they simply don't give rating to any company undergoing an investigation, self-imposed or not.  ONP management’s attempt to be transparent and to reassure investors by voluntarily ordering their own investigation by retaining a top-tier international law firm and a big-four audit firm thus appears to produce the unintentional effect of admitting wrongdoing.  As the result, ONP’s stock tanks by 18.7% at the close of Wed even though Roth Capital only delays the rating to wait for more information, whereas another company suffering from a worse downgrade normally only loses a few percent at the most. This is a good case of “no good deed goes unpunished.”  Apparently, any investigation, whether voluntary or not, gives the appearance of trouble and scares off potential investors.  ONP’s CEO is learning the hard way that sometimes a small problem should be left alone lest it grows into a big problem.

    Second, what is the likelihood that there is even remotely some truth to Muddywaters’s allegations?  A careful reading of the abundant data and documents released by ONP indicates that there’s no wrongdoing.  However, for anything as complex as running such a big operation as ONP, there's bound to be little discrepancies here and there, and if one looks hard enough, one will find them.  These discrepancies, assuming they exist, should be small and inconsequential.  It is possible that Roth Capital plans to wait for the voluntary audit committee to work out all of the discrepancies before they resume the rating.  Depending on the complexity of the transactions and the priority of the auditors, the audit can last  anywhere between a few weeks to a few months, though the timing is almost impossible to predict.

    For the nervous investors, there are a few reassuring facts that suggest that ONP is free of fraud:

    A. Chairman and CEO Zhenyong Liu has never sold a single share since he founded the company.  If there’s fraud, he would have offloaded his shares in anticipation of inevitable exposure.  He’s been instead focusing hard on building ONP into one of the most successful paper companies in China and he seems to be doing everything right, from cost cutting to physical expansion to moving to higher margin products, etc.

    B. ONP’s Board of Directors consist of several highly respected independent directors who have confirmed, independently of Liu, that all of Muddywaters’s allegations are false and ONP’s revenues and margins are indeed correct and accurate.

    C. Reputable institutional investors and analysts, after carefully examining the papers and visiting ONP’s plant, also agree with ONP’s management that ONP’s numbers are accurate.

    Thus, with earning release coming in about two weeks, what is the right price for ONP stock?  At the current level of $4.36, ONP is absolutely oversold by any account.  Even if there are irregularities in ONP’s numbers, ONP is still cheap for any price under $5-6, which is easily 3-4 times below its true intrinsic value.  The true intrinsic stock value can be estimated by multiplying ONP’s earning by the average PE 27.85 of the paper and paper product industry, giving $1.05 x 27.85 ~ $30 per share.  If a more conservative PE of 15-20 is used, the intrinsic stock value would fall in the range of $16-$21.  At the current price, ONP hence is arguably the most misunderstood and undervalued stock in the market today.




    Disclosure: Long ONP
    Stocks: ONP
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Comments (8)
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  • Business Economics Analyst
    , contributor
    Comments (2565) | Send Message
     
    This author posts conclusory statements without providing a shred of facts, evidence or sound reasoning therefrom. The author further goes on to make statements that appear blatantly false.
    The author states that all of Muddywaters allegations were disproved in details but he provides nothing at all in support of that – no facts, evidence or reasoning. He just states the allegations are disproved and we are supposed to believe it without his providing any support for that point. The author calls on to falsely claim that ONP Management have released reams of documents and data – they have released a paucity of documents and data.
    The author accuses other short sellers of distort and talking down the stock for their own personal gains – but provides no facts, evidence or reasoning to support that claim. Indeed, he does not even say what alleged distorting was done. We are just supposed to except his conclusions.
    The author makes the blatantly false representations that analysts agree with ONP’s management that ONP’s numbers are accurate. I have not seen anywhere that the analysts have made such representations. Analysts do not conduct audits and accept the numbers as reported by the company. Of course, the author did not specifically identify the analysts that he was referring to and where he claims they made such representations. So that you can independently verify that I am correct, I will provide you with the analysts and their websites: (1) Roth Capital was one such analyst, website at www.roth.com. Roth Capital have already withdrawn their report and stated they need to do further due diligence; (2) Julie Chen at Hudson Securities, website www.hudsonsecurities.c...; and (3) Brian Connell at Harbinger Research, website www.harbingerresearch..... The author is not telling you the truth – these analysts will not tell you that they can confirm that ONP’s revenue and margins are correct and accurate. They will tell you they just got the numbers from ONP. Don’t believe me or the author, just contact them and see. Get a statement from them in writing and prove me wrong. Good luck.
    I have not seen anywhere statements by any of the institutional investors will tell you that they can confirm that ONP’s revenues and margins are correct and accurate. You can find a list of 17 of the institutional investors through the wall street journal online and probably through other websites like MSN. Like the rest of us, they just got the numbers from ONP, their SEC filings. Don’t believe me or the author, pick a few at random and contact them and see. Get a statement from them in writing and prove me wrong. Again, good luck.
    The Board of Directors has not confirmed that ONP’s revenues and margins are correct and accurate. Instead, one of the first actions of the newly appointed directors, Drew Pearson and Mr. and Mrs. Wang, who are also the sole members of the recently formed audit committee, was to decide that it is necessary to investigate fraud allegations against the management by hiring a law firm to investigate and an accounting firm to do an audit. Drew Pearson is an accountant that is the head of the audit committee. Don’t believe me or the author, contact Drew Pearson and ask him if he will make a statement that he can definitely confirm that ONP’s revenues and margins are correct and accurate. Drew Pearson can be contacted through the website of his accounting firm at www.bpaccountants.com/.... Get a written statement by him and prove me wrong. Once again, good luck.
    The fact that there has been no reported sales of stock by Chairman and CEO Zhenyong Liu is simply a red herring. Look at other examples. NEP’s CEO and Chairman didn’t report selling any shares of stock and the company fired him and his mother, reported that money from the bank accounts was going directly to him, reported that all the financial reports need to be restated, and is currently suspended from trading for not being late on filing its 10-Q and is on its second extension of time. I can make paint plenty of reasonable scenarios under which a CEO would know a company was a fraud and not sell stock, but so can you I imagine, so why speculate. The point is that there almost always are at least a period of time where a CEO knows a company is a fraud and doesn’t report selling his stock, so this is simply a red hearing.
    The problem with this instablog is that its point is to assert that ONP is not a fraud but it just fails to provide a single bit of evidence, facts or reasoning by which one could come to that conclusion. Contrast that with the muddy waters report at muddywatersresearch.com. They provide you plenty of facts, evidence and reasoning and information by which you can go about independently verifying the information. Look at my instablogs, where I show the problems and inconsistencies with ONP through cites to ONP”s own representations in its SEC filings, on its websites and in the videos of ONP by the promoters of its stock.
    The hallmark of almost all frauds involves a claim that you should just believe reputable people. I suggest that you not accept what I say or what this author says but look at the evidence yourself and make your own decision. I don’t believe it will take long to get a sense that there appears to be some very serious problems with ONP’s representations, as well as the representations of this author.
    Disclosure: Short ONP
    28 Jul 2010, 11:46 PM Reply Like
  • SA_Member_344233
    , contributor
    Comments (460) | Send Message
     
    Seesaw,
    Can YOU, physically YOU, confirm any company's numbers are legitimite? Even the office next door, do they give you full access to all of their information, have honest, open communication with their customers, government officials and tax records, etc. Nobody can even say 100% that GE or Bank of America is not misstating their income. Hell, the US government updates GDP and other metrics for YEARS after it was originally reported too. Your argument is a simple smoke and mirror tactic without any evidence either. Where re YOUR facts? "MuddyWaters talked to someone at some paper company who said 'ONP's turnover is above industry averages'". That is not a fact, that is here say and would be thrown out in a US court, and you know that. You continue your lies on a daily basis for the sole purpose of greed.
    29 Jul 2010, 12:33 AM Reply Like
  • SA_Member_344233
    , contributor
    Comments (460) | Send Message
     
    "Drew Pearson can be contacted through the website of his accounting firm at bpaccountants.com/.... Get a written statement by him and prove me wrong. Once again, good luck."

     

    Uhhh... Drew Pearson is a very established business man with an excellent track record. Why make a statement to an anonymous blogger or email when a formal audit will dispell all rumors in a matter of weeks/months? Again, smoke and mirrors by you.
    29 Jul 2010, 12:35 AM Reply Like
  • Business Economics Analyst
    , contributor
    Comments (2565) | Send Message
     
    Mikesss:
    the smoke and mirrors is all yours.
    Point B of the article above was that investors should be reassured because the Board of Directors, which Drew Pearson is a member have, have confirmed that ONP"s revenues and margins are indeed correct and accurate.
    My point is that this is a false statement and it is encouraging investors to buy or hold ONP when it should not be because it is a false statement.
    You also make statements for which you have no basis to make. There has been no representation by anyone that an audit will be done in a couple of weeks or that it will dispel all rumors. We haven't yet had a statement that a lawyer or an audit firm has actual been hired, much less any time estimate for an audit. We don't know when, or even for sure if, the audit will occur. All that we know is an expressed intention by the board of directors of ONP.
    Again, you make a statement without any support or evidence that Drew Pearson is a well established business man with an excellent track record. I have no information on this and you have presented none. He may or may not.
    What I do know is that Mr. Pearson's accounting firm has been involved with a number of chinese smallcap reverse merger companies and some appear questionable. For example, Mr. Pearson's firm was the audit firm for ORS, a "alleged" Chinese mobile phone manufacturer that appeared to me to be a pump and dump scheme. The stock was trading at a high of about $5.50 a share in 2008 and is now trading at about $.23 cents a share. Mr. Pearson's firm resigned as auditor some time beginning to middle of this year I believe.
    I can confirm that Mr. Pearson personally stated the opposite of the representation by this poster - he did not confirm that the revenue and gross margins were accurate - instead, he said lets wait to see what the results of the audit are.
    29 Jul 2010, 01:43 AM Reply Like
  • Business Economics Analyst
    , contributor
    Comments (2565) | Send Message
     
    Mikess:
    Your point that you can't confirm any company's numbers are legitimate seems to be in direct contradiction to the article's point that analysts, investors and the board of directors have confirmed the numbers are accurate.
    In a sense I can agree with you, the best you can do is do everything you can to try to show the numbers are not accurate and, if you can't, then it seems that you should have a much better chance that the numbers are at least reasonably accurate.
    however, if in the process you find plenty of evidence that the number are inaccurate, which i have done and detailed in my instablogs which I refer you to, then you should have a much better chance at being correct that the numbers are not accurate.
    I don't know much about GE, but Bank of America was certainly, in my opinion, misrepresenting their financial status, even if in an arguably legal way. Bank of America was doing something similar to Enron with off balance sheet transactions. Bank of America, like many of the big banks, created a Structured Investment Vehicle ("SIV") as a separate entity and kept it off its balance sheet, even though it was utlimately responsible for it. This was legal and accepted in the accounting profession, even by some of the most reputable, which partly to my previous expressed criticism of accountants and quotes from Charlie Munger to that affect. Ultimately, Bank of America took the SIV back onto its books - likely due to pressure from regulators. To understand the effetcs, Bank of America's fourth quater 2007 earnings fell 95% due to SIV investments. See en.wikipedia.org/wiki/....
    My facts are contained in my two instablogs: (1) Orient paper Inc. (ONP): Does It Add UP? Questions for Tommorrow's Conference Call; and (2) Another Bad Video for Orient Paper, Inc. (ONP) by a Promoter of the Company?. To put your mind at rest, I rely on ONP's representations in their SEC filings, websites and from their CFO, as well as the 2 video's put out by the stock's promoters, Rick Pearson and Doug from wallstreetmedia.com.
    As far as Muddy Waters representations that ONP's turnover is above industry averages, that is undisputed as far as I understand. That is from Muddy Waters, not me, so I don't need to defend it. I am willing to research it and give me you my opinion and the evidence for it if you like. It is easily independently verifiable through either industry statistics or examination of SEC filings of other paper companies, etc.
    By the way, Muddy Waters wasn't the first article suspicious of ONP. Back in June 8, 2009,a Motely Fool article entitled "Beware Penny Stocks" was highly critical of ONP. See caps.fool.com/Blogs/be....
    29 Jul 2010, 02:04 AM Reply Like
  • cbax35
    , contributor
    Comments (2) | Send Message
     
    Seasaw what evidence have you offered? This authors post was not intended to provide evidence but summarize what is going on and his thoughts. The evidence has already been presented in other sources, go dig it up. You can read all of the transcripts available. I am sure you are scared to death that the stock rises today and that is why you are posting like a maniac. Also, so funny you mention the motley fool article, lol, they put out about 100 such articles each day pretty much randomly picking a ticker symbol, it is their way of advertising. Have fun on your short today buddy. Im long at $4.40
    29 Jul 2010, 06:23 AM Reply Like
  • abasso47@hotmail.com
    , contributor
    Comments (10) | Send Message
     
    The company just came out with preliminary earnings of .28 for this quarter...if this guy is lying is got a pair of brass balls the size of Road Island.

     

    al
    29 Jul 2010, 08:53 AM Reply Like
  • Business Economics Analyst
    , contributor
    Comments (2565) | Send Message
     
    cbax36:
    As I stated in my post, my facts are contained in my two instablogs: (1) Orient paper Inc. (ONP): Does It Add UP? Questions for Tommorrow's Conference Call; and (2) Another Bad Video for Orient Paper, Inc. (ONP) by a Promoter of the Company?. To put your mind at rest, I rely on ONP's representations in their SEC filings, websites and from their CFO, as well as the 2 video's put out by the stock's promoters, Rick Pearson and Doug from wallstreetmedia.com.

     

    User 207439:
    How does a company prerelease expected earnings when they report the need for a an audit and fraud investigation into senior management and their major analyst suspends coverage pending the fraud investigation and their own due diligence?
    The CEO may have delusions of grandeur. He announced in 2008 that they were building a 2 million square metre facility with an annual production of 1.2 million tons to produce corrugated paper, offset paper and writing paper. See www.pulpandpapercanada....
    Where is that facility? Nowhere to be found, not even ever referenced or mentioned in their SEC filings or on their website. ONP is currently not even claiming to produce a 4th of that and that volume is questioned. The claim did appear to resurface in Doug of wallstreetmedia.com's video. He, of course, sold his ONP stock shortly after his visit to ONP.

     

    ONP claims to have a production capacity of 270,000 tons per year (there are doubts about this). However, he reported in 2008 that they were going to build He was reporting in 2008 that ONP planned to build a new paper mill in the 2nd half of 2008, with an annual production of 1.2 million ton, that would be a 2 million square feet
    29 Jul 2010, 10:14 AM Reply Like
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