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Cutting through Muddy Waters and Finding the Real ONP

|Includes: Orient Paper Inc. (ONP)
It's amazing how illogical and downright silly the Muddy Waters criticism of ONP is.  And it's just plain scary that it's had such an impact on the stock.  The Muddy Waters claim is that ONP "replaced 80% of its 2008 customers". The simply ASSUME that because a top 10 2008 customer didn't make the top 10 list in 2009 that they must no longer be a customer. Also, nevermind the fact that in 2009 the top five spots reflect revenues that are higher than even the #1 spot in 2008. I guess growth with existing or new customers is now a sign of fraud. Absurd.

It's hard to believe that people have been doing anything but dismissing Muddy Waters claims, like how steam is coming off of the machines. If you've never worked in a factory, find someone who has. This is what happens when it's moist or when it rains. I have no doubt that I could take selective photos of every manufacturing plant in the world and make them all look like a decrepit piece of junk. That's why you get real institutional investors to evaluate a company, and not a couple of bozos who tried to extort a company by offering to write a positive report for $300,000, which is Muddy Waters reportedly did (although they deny it). 

Next, let's take a look at how the amazing investigative reporters Muddy Waters verified whether ONP's customers are legit. OK ready? So 5 were verified. But the other 5 must be a fraud. Why? Because they tried calling them up and they couldn't get immediate answers. So let's get this straight, two guys with absolutely no record as legitimate research analysts start cold calling companies and they get no answers, so now ONP is a fraud? I'm sure that these guys, who by admission can't even speak Chinese fluently (see below), got really far and at best managed to convince the companies that they weren't making crank calls. How about instead they conduct some real analysis, like financial reports and financial data for these customers? How about they actually speak to management of those companies? Are we expected to be reflexively dismissive of BDO, an independent auditor who has verified ONP's numbers and instead trust Muddy Waters, a firm that after reportedly failing to extract $300,000 to write ONP a positive report launched its inaugural report to slam ONP, which of course they've shorted?

Another central criticism by Muddy Waters is how could you possibly spend $27 m when you could get a $10 m machine that is a fraction of the speed? OK so by that logic, if I can buy an obsolete computer today for $100, does that mean that if a brand new computer comes out that is top of the line and is 5 times faster than the old computer that I shouldn't pay more than $500 for it? That's just not how it works, and anyone who actually buys things knows this. Again, pure silliness.

I think it's pretty clear that Muddy Waters tag team is either just vapid or downright maliciously attempting to destroy a company with false accusations in an attempt to profit from shorting the stock. If you have any questions about the credibility, reliability or intellect of Muddy Waters--why don't you see for yourself? Here are some quotes from their reports. Remember, this is supposedly a professional research firm:

"I never worked for a Wall Street bank, and until the day at the airport, I thought a 10‐K was a weekend race. Rick [Pearson's] got that over me. But I do know factories!"

"It is true that Sean [a Muddy Waters principal] is not proficient in Chinese, and our interpreter had to translate a good deal of technical speech."

"It is true that I didn’t ask many questions during the visit."

"[My father] told me that he was quite impressed with the CFO, Winston Yen. He also said that he had heard Chairman Liu is “different” from other Chinese company bosses in that he doesn’t drink, smoke, or chase women. That was a red flag to me. In my time in China, I’ve found out that people or things billed as “different” are usually too much “the same.” I thought that if the Boy Scout legend turned out to be untrue (which it did – see the social lunch I describe in the previous section), then the fact that this rumor has been created is alarming. It shows a deliberate attempt to game the American investor psyche."

What?!! Yeah, what a great smoking gun! And onto my favorite:

"The mistake too many foreign businesspeople make is thinking that the English speaking, relatively polished people they interact with here are representative of China. This myopia is a major factor affecting equity research on Chinese companies. A number of my closest, dearest friends are Chinese."

Wow! Well I take it all back--Muddy Waters is definitely qualified bc the principals have some very close and dear friends who are Chinese, so clearly they understand what's up. Sheeesh.

I'm long ONP, bc it's a good company with tons of potential. Eventually, the truth will come out....


Disclosure: Long ONP