Orient Paper Inc. is a paper manufacturer that has claimed incredible growth, claiming to have more than tripled its production since 2006 and more than quadrupled its net income. ONP has positioned itself as a rapidly growing company, using advanced R&D and cutting edge technology to produce paper efficiently at a low cost, resulting in gross margins and inventory turnover much higher than the industry average.
Rick Pearson, a writer for the street.com, wrote several articles recommending Orient Paper Inc. as a great investment and a video of his visit to the company was posted on Youtube. Link at http://www.youtube.com/watch?v=0eS9E5vYhQ8. The video was cited as a rebuttal to a research report by Muddy Waters claiming that the company was a fraud and putting a strong sell recommendation on the stock.
Rick Pearson’s video created quite a stir because it appeared to show ONP’s manufacturing facility operating a small production line using old, dilapidated equipment in contrast to the company’s claim of cutting edge technology producing paper resulting in revenue of 102 million dollars in 2009. In other words, despite Rick Pearson’s voice praising the performance of the company, it appeared incredulous that the operation depicted in the video could produce a fraction of the paper necessary to support the claimed revenue or operate at anywhere near the efficiency levels to compete with the larger manufacturers that had advantages of economies of scale.
The aftermath has seen a flurry of back and forth between ONP and Muddy Waters as well as articles between those long and promoting the stock and those short and believing the stock to be a fraud. ONP and the promoters appear to have been unconvincing as the stock has plummeted in price, dropping from over $8.00 a share to under $5.00 a share.
Another purchaser and promoter of the stock has come out with a recent video of a tour of Orient Paper Inc. Like the Pearson video, this video appears to be more damaging to the company’s claims than helpful. The video can be found at http://wsmco.com/show.aspx?1688_Our_Visit_to_ONP. A careful analysis of the video raises serious questions. I recommend you review the video and consider the following:
Where are all the production lines?
If the narrator is truthful that he took pictures of the entire facility, then it appears from the video that ONP simply does not have the production lines its claims. ONP claimed to have 8 production lines as of March 2010 in its SEC filings. On its website recently updated, ONP claims 7 production lines. In the video, the narrator says that he was given a complete tour of the facilities and took pictures of everything. However, a review of the video appears to how 2, maybe 3, production lines total. One of the production lines appears to be of the digital photo production line that is very small, total capacity of 2500 tons reported by the company in its SEC filings. The other production line does not appear very large either.
Where is the complete production process?
From the video, ONP does not appear to have the complete facilities necessary to manufacture the paper. There are a number of steps to producing paper, see link at http://nfb.ca/film/how_do_they_recycle_paper, and search youtube for other paper manufacturing videos. The promoter’s video appears to be missing parts of the production line. For example, it does not appear to show any facilities for or processing of the raw materials necessary for turning them into new paper.
Where are all the employees?
ONP claims to have 600 employees. The video appears to show approximately 40 or 50 employees. The pictures show bicycles and scooters of the employees and again appears to only show approximately 40 or 50 of those.
Where is all the activity at the headquarters?
The picture of the headquarters appears to show only 2 cars in the parking lot. It appears sparse and barren.
Where is the sales department?
Nothing was shown regarding any sales department, sales people or sales operation.
Where is the administration?
Nothing was shown regarding any administrative department or work.
Where is the clutter?
Most manufacturing operations, indeed most operations of any sort, that are producing and growing at the pace that ONP claims to be growing, tend to have a lot of clutter. It is not necessarily messy ; it can be organized and neat, but it is usually there. If you haven’t seen such operations, look on the internet for pictures of small, high producing, fast growing manufacturing operations. Go visit them. See how they look. In doing operations of any sort, including paper, you accumulate physical items, supplies, equipment, etc.
The pictures of ONP simply do not have this look. The pictures show areas that are sparse and barren, with wide open spaces. Some of the buildings appear almost empty. There is little there, other than the specific items necessary to claim production, such as some equipment, some paper allegedly being stored, or some raw materials in a heap in the yard. There is not all the other materials and clutter that you normally see with a small, high producing, fast growing company. In other words, ONP has the look more of being stages for show, with the necessary details omitted, rather than the look of a small, high producing, fast growing company that is busy and cluttered.
What are the contracts?
The narrator shows documents that are represented as large contracts with local companies. Again, there is no detail. No information is given as to what the contracts are for, who the contracts are with, what the amounts of the contracts are.
What are the details on the alleged 1000 acre development and 3 buildings?
The narrator shows a picture of an alleged 1000 acres that the Chairman says they are planning to develop. Also, a picture of 3 large buildings are shown. No information is given on the development. The narrator does not say what the development is for, what it will cost, how it will be paid for, or when it will be completed. No details are given on the 3 buildings either.
Where are the disclosures on the development of the 1000 acres or 3 buildings?
There does not appear to be any disclosures in the recent SEC filings, including in the capital raise documents, or on the company’s website of a planned development of 1000 acres or 3 buildings. The disclosure of such a development would have a major impact on an investor’s analysis and not necessarily good. Expansion can be good for companies or bad. While some companies have done well expanding; others have gone bankrupt expanding. To make an analysis, one would expect to be provided information on what the development is for, what is will cost, how the company is going to pay for it and when it will be completed.
Where is the count of the trucks?
The narrator says at the beginning that he showed up unannounced and planned to park outside the facility and count the trucks in and out, presumably in response to allegations that ONP is a fraud because it has hardly any trucks going in and out of its facility yet would need a great deal of trucks going in and out to deliver the raw materials and produced paper. The narrator never indicates that he spent any time watching and counting the trucks going in and out and therefore, never provides any report of any specific number of trucks going in and out in any specific time period.
What is the problem with the lack of details and disclosure?
Classic tactics by fraudsters involve providing vague, general information for which their target’s either fills in the details themselves or assumes the details to be there, as the human mind tends to do. Meanwhile, there are no specifics provided to allow for follow-up and a verification process that might refute specific statements. This video is along those lines: it shows pictures and provides vague, general information but little specificity that can be verified or refuted. Nothing is presented to show that the actual production numbers or revenues are accurate.
What would one expect?
The narrator states that the Chairman provided him with a complete tour of the entire facilities and he had pictures taken of everything.
1. A picture and plan of the entire operations – like the one of the alleged planned 1000 acre development, along with the CEO explaining what is shown.
2. A tour of the entire manufacturing process, from the first step to the last step, with the CEO explaining the process.
3. A tour of each production line, with an explanation of what it produces, how much it produces, etc.
4. A tour of the sales department and administration departments.
5. An interview with the CEO, giving him an opportunity to alleviate concerns by providing detailed and verifiable information to show that its reportings are accurate and which would necessarily then address the concerns raised by Muddy Waters and other commentators.
Is the Narrator credible?
There are questions about the narrator’s veracity in claiming that his visit was unannounced and he was surprised to meet the Chairman and get a tour of the facilities. The narrator contends he just made an unannounced visit to the company to sit outside the facility in his car to count the trucks in and out, that the guard caught them snapping pictures, brought them inside the office, and the Chairman showed up and gave them a complete, personal tour of the facilities. This is a narrator who either owns, operates, works for, or posts at Wallstreetmedia.com; has previously promoted ONP in videos posted there; and is long the stock himself. Additionally, he evidently abandons his plan to count the trucks going in and out of the facility in an hour or two, because we receive no report on any number of trucks going in and out in any specified time period.
The video intending to promote ONP again appears to show only a small operation that is incomplete, lacking the number of production lines claimed by the company and lacking the production capacity claimed by the company. Previously unannounced plans for expansion that are shown do not support the claim that the operation had revenues of 102 million or a production capacity of 270,000 to 280,000 tons a year, as claimed by the company. The narrator claims to have shown up at ONP to count the number of trucks going in and out in an hour or two, but never provides any report that he watched for an hour or two, that he counted the trucks, and never gives any count of the trucks going in and out in an hour or two.
To attempt to eliminate factual disputes, my approach in this article has been to rely on the representations by the company and its promoters. The only videos I link to are by promoters of the company. The facts are taken from the video and additional facts are drawn from ONP’s own SEC filings and website. My previous instablog Orient Paper Inc. (ONP) Does It Add UP? also relied on ONP’s own representations to show problems and inconsistencies with ONP.
Disclosure: No position. Was long ONP prior to the muddy waters report. Then was short ONP. Currently no position.