It has been a few days now since the Sino-Forest "take-down" and we can conclude a few interesting things. Certainly the report hit at the heart of investors' fears over China companies, and despite the sensational language contained enough validity to motivate people to act (by selling shares). I personally think that the timing was everything, as the report was released into a market that was already weak, thus allowing the obscure firm, Muddy Waters, to move markets. Where do we go from here? I think that this will prompt more attacks by short sellers, given how profitable this operation was to date. Ultimately this is good for the markets, as tough as it is for the company under scrutiny. Dissenting opinions encourage discussion, and in this case, forced the company to disclose GPS co-ordinates and proof of ownership for facilities visited. This is one of those rare, market defining moments that will forever change the way people do business. Whether it proves to be a fraud or not (I think it is highly unlikely that the entire business is a fraud, even though there may later prove to be some exaggeration along the way), investors will learn to be dissenting and always question what is put in front of them. Research firms will be scrutinized (perhaps registered?) to determine legitimacy going forward. Muddy Waters may have picked the wrong firm to target, as with a billion dollars in cash one can hire a lot of lawyers. Incidentally, if the shares outstanding are to be trusted (likely, since it's a Canadian transfer agent), and the cash is to be trusted (likely, since this is under intense scrutiny and held in international banks), then $1bn divided by ~250mm shares outstanding is ~$4/share in cash, plus value for the business. It's a shame that the markets take a shoot first, ask questions later approach. (whatever happened to innocent until proven guilty?) It makes for interesting viewing to say the least - I only wish I was making money one way or another! (short or long!)
Disclosure: no positions
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