Sino-Forest Corp. is unique among Canadian forest companies. Based in Mississauga and run by executives in Hong Kong who manage forest assets in China, Sino-Forest is positioned to ride the resurgence of economic activity in China at a time when the rest of the Canadian forest industry is in crisis because of the depressed North American market.
It also has a substantial head start over other Canadian firms in a range of industries hoping to do business in China, where federal Finance Minister Jim Flaherty is leading a trade mission this week.Formed in 1994, Sino-Forest is now the largest forest operator in China. The company owns and manages about 434,000 hectares of plantation trees in China and derives most of its revenue from there, selling wood products needed for infrastructure investment and the rebounding housing market.
Sino-Forest surpassed analysts' expectations with second-quarter profit of $45-million (U.S.) or 23 cents a share, compared with $43.4-million or 24 cents a year earlier. Revenue increased 21.3 per cent to $224.4-million, the company said in its earnings report yesterday.
What the CEO said
"The rebound we saw in China's economy and the forest products industry in the first quarter continued in the second quarter of 2009," chief executive officer Allen Chan said during a conference call.
"We are pleased to report record strong growth in revenue, as we have witnessed an increase in fibre demand, which was attributable to China's economic stimulus spending and rebuilding work in Sichuan province post-earthquake, while fibre prices remained steady during the quarter. We anticipate log prices will return to 2008 levels by the end of this year," he said.
The China context
Goldman Sachs has raised its forecast for Asian economic growth this year and next, projecting that China's gross domestic product will grow 9.4 per cent this year and 11.9 per cent in 2010.
Mr. Chan said the government's $585-billion stimulus spending package and heightened lending activity by the country's mostly state-owned banks have spurred activity and restored confidence in Chinese consumers.
"When the Chinese people ... see that the government is committed to such an extent, they will be confident enough to use their money to expand their businesses," Mr. Chan said. Real estate sales were also up by more than 31 per cent in the first six months of this year from the first half of 2008 - spurring demand for the lumber needed for houses and furniture, he said.
What the experts say
Chinese stimulus is clearly working, RBC Dominion Securities analyst Paul Quinn said in a research report. "The government has committed to build 5.2 million low-rent homes over the next three years and subsidize homes for 7.5 million poor urban families by 2011. Demand for wood panels for concrete forms, as well as floors and other finishing for new housing, is expected to keep demand for Sino's timber robust."
There is no other company like Sino-Forest, said Richard Kelertas of Dundee Securities, who has a buy (sector top pick) rating and a target of $20 on the stock. "Sino-Forest continues to be the best-positioned timber plantation manager/owner to take advantage of the expanding wood fibre shortage in China," he said in a research note.
Will the bubble burst?
"There is some concern that easy credit has gone too far, fuelling a boom in urban property markets and driving the Chinese stock market up 84 per cent to date," Mr. Quinn said. "The government has shown signs of reining in private borrowing. It has introduced tighter controls on large bank loans, increased credit oversight and has upped bond purchase requirements for large banks in an effort to soak up excess liquidity."
What the stock has done
Sino-Forest closed down 27 cents (Canadian) at $15.92 yesterday, up 61.3 per cent year to date. The company has a market capitalization of more than $3-billion. Eric Yan, a portfolio manager with Mavrix Fund Management, noted that the stock advanced by more than 10 per cent last week alone. "We actually participated in the last private placement a couple of months ago. The shares at that time were a little over $11 ... so they're not too bad, a 30- to 40-per-cent gain already."
It is "just a function of time" before more investors figure out Sino-Forest's long-term potential, Mr. Yan said.
© The Globe and Mail
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