Sino-Forest Reports First Quarter 2011 Results

TORONTO, June 14, 2011 /PRNewswire/ - Sino-Forest Corporation ("Sino-Forest" or the "Company") (TSX:TRE) announced its financial results today for the first quarter ended March 31, 2011. All amounts in this release are expressed in U.S. dollars unless otherwise indicated.

First Reporting Under New Accounting Standards

All publicly accountable enterprises in Canada were required to adopt new International Financial Reporting Standards ("IFRS"), replacing Canadian Generally Accepted Accounting Principles ("GAAP") effective January 1, 2011. The impact is discussed below under "Comparison of Q1 2011 to Q1 2010" - IFRS".

Financial Highlights for the First Quarter ended March 31, 2011 compared to 2010:

• Revenue increased 35% to $339 million
• EBITDA increased 34% to $192 million
• Gross profit margin per m³ from sale of standing timber was $44
• IFRS accounting for fair value of financial instruments resulted in a non-cash charge of approximately $53 million or approximately $0.22 per share
• EPS of ($0.08) in Q1 2011
• Cash, cash equivalents and short term deposits were $1.1 billion as at March 31, 2011

Notes (1) and (2) are at the end of this release

Comparison of Q1 2011 to Q1 2010, as previously reported

(i) Impact of IFRS

One aspect in particular that has materially impacted the Company's reported net income is the accounting for an aspect of the Company's financing strategy and, specifically, the 2013 and 2016 Convertible Notes (collectively, the "Convertible Notes"). Pursuant to the terms of the Convertible Notes, the Company has the option to settle the Convertible Notes by delivering cash or a combination of cash and common shares.  IFRS requires the Company to fair value this option as an embedded derivative liability at the end of each reporting period.  As the Company's share price increases, this option becomes more valuable (or more costly to the Company) and therefore results in a charge to the income statement.  As at March 31, 2011, the share price was Cdn$25.30 which resulted in a charge to the Company's income statement of approximately $53 million.

As the share price decreases, the equity convert option becomes less valuable (less costly to the Company) and therefore results in a gain being recorded in the income statement.  Based upon the closing price of the Company's common shares on Friday, June 10, 2011 of $4.47 per share, the Company would record a gain from fair valuing the option of approximately $450 million in the Company's Q2 2011 income statement.

In order to prevent the share price volatility from impacting the income statement, the Board of Directors has approved amendments of the indentures governing the Convertible Notes to remove this option.  Such amendments do not require the consent of the Convertible Note holders and the Company will take the required steps to implement the amendments.  In future quarters, after Q2 2011, the volatility of the Company's common share price will no longer affect the reported net income in such manner.

An additional impact on the Company's reported profit before tax when compared to Q1 2010 as previously reported was recording a gain on the change in fair value of planted plantations and additional charges to Cost of sales, Selling and administration expenses and Finance costs.  The gain on change in fair value of planted plantations was $10.4 million and the additional charges to Cost of sales, Selling and administration expenses and Finance costs was $10.1 million.

(ii) Income Tax

While the basis of calculating the Company's tax provision methodology changed from Canadian GAAP to IFRS, the actual provision in the income statement was not materially affected in Q1 2011.  However, as a result of new information that has become available in Q1 2011, the Company now assesses income tax by applying the rate of 15% for operations in all provinces in the PRC (as compared to only certain provinces in Q3 2010) where the Company conducts business. This has resulted in an additional non-cash tax charge in Q1 2011 of approximately $6.0 million.

(iii) Selling and administrative expenses

Selling and administrative expenses rose from $23.0 million in Q1 2010 to $30.3 million in Q1 2011 primarily due to the fact that Q1 2011 includes the consolidated results of Greenheart Group including Selling and administrative expenses in the amount of approximately $5.8 million compared to nil last year.  Last year, the Company did not exercise significant influence on Greenheart Group and therefore did not consolidate its results.

Overview

First quarter 2011 results reflected ongoing strong demand for wood fibre, increases in log prices in the range of 2% to 6% quarter-over-quarter, as well as achieving attractive margins by benefiting from capped fibre purchase prices negotiated under our fibre acquisition agreements.

Mr. Allen Chan, Chairman & Chief Executive Officer said, "Subsequent to the first quarter, we entered into long-term master agreements to acquire up to 200,000 and 66,000 hectares of mature (25 to 50 years old) plantation trees in Shaanxi and Yunnan Provinces, respectively. We expect to acquire the fibre over a ten-year period at a price not to exceed RMB320 (US$49) per cubic metre, and to lease the underlying plantation land for sustainable replanting at a price not to exceed RMB525 (US$80) per hectare per annum for 30 years. These agreements further expand our operations into highly populated inland provinces with high projected economic growth, dense forest coverage, and substantial demand for our wood products for construction and manufacturing."

Business Segment Highlights

Total revenue in the first quarter 2011 increased 35% to $338.9 million, mainly due to the increase in revenue from our wood fibre operations.

Wood Fibre Operations

Plantation Fibre

The following table sets forth revenue from our plantation fibre operations.

Revenue from sales of plantation fibre increased 39.2% to $218.2 million in the first quarter 2011 from $156.8 million in the same period in 2010, mainly due to an increase in the revenue from the sales of standing timber, partially offset by the decrease in the revenue of logs.

The average sales per hectare increased 9.5% to $13,842 per hectare in the first quarter 2011 from $12,643 per hectare in the same period in 2010.

The average yield per hectare sold as standing timber was 160 m³ in Q1 2011 and 180 m³ in the same period in 2010.  The average yield per hectare sold as logs was 73 m³ in Q1 2011 and 127 m³ in the same period in 2010.

During the three months ended March 31, 2011, we sold approximately 9,868 hectares of plantations which were acquired under the master agreements, mainly in the provinces of Guangxi, Yunnan and Hunan.

At first quarter end 2011, the total area of plantations under management in the PRC was 866,600 hectares, up 9.9% from fourth quarter ended December 31, 2010.

Trading of Logs: Revenue from trading of imported and domestic logs and wood products increased 28.0% to $106.2 million in the first quarter 2011. This increase was primarily due to different mix of species of wood logs traded with relatively higher volume of logs at a higher average price sold.

Manufacturing and Other Operations: Revenue from manufacturing and other operations increased 13.9% to $12.9 million in the first quarter 2011.

Greenheart Group: Sino-Forest's revenue from its majority ownership of Greenheart Group operations was $1.7 million in the first quarter 2011.

Gross Profit

Gross profit increased 28.1% to $125.8 million in first quarter 2011, while gross profit margin (being gross profit as a percentage of revenue) decreased to 37.1% in the first quarter 2011 from 39.1% in the same period in 2010, mainly due to the fall in gross profit margin of plantation fibre operations.

Wood Fibre Operations Gross Profit Margin

Plantation Fibre: Gross profit margin from sales of standing timber decreased to 49.4% or $44 per m³ in Q1 2011 from 54.8% or $49 per m³ in Q1 2010 as we sold relatively more hectares of plantation trees in 2011, which had a higher average cost per hectare in 2011, compared to 2010.

The gross profit margin from sales of logs was 79.3% or $43 per m³ in the first quarter 2011, compared to 47.9% or $38 per m³ in the same period in 2010.  The increase was mainly due to the relatively lower average cost of plantations that we sold in 2011 compared to 2010, despite a fall in average selling price from 2010 to 2011.

Trading of Logs: Gross profit margin from trading of imported and domestic logs and wood products decreased to 5.2% in Q1 2011 from 6.3% in the same period in 2010.

Manufacturing and Other Operations Gross Profit Margin: This gross margin decreased to 5.9% in Q1 2011 from 12.8% for the same period in 2010, mainly due to fall in the average selling price as a result of increased competition in the wood flooring business segment.

Greenheart Group Gross Profit Margin: The profit margin from our Greenheart Group operations was 22.6% in the first quarter 2011.

Selling and administrative expenses: Selling and administrative expenses increased 31.9% to $30.3 million in Q1 2011 from $23.0 million in same period last year.  The increase was mainly due to increased staff costs, incremental plantation maintenance fees as a result of increased plantation profile, and incremental costs of approximately $5.8 million relating to the newly acquired subsidiaries of Greenheart Group.

Net Income: As a result of the foregoing, and primarily as a result of the fair value adjustment of the embedded derivatives of our outstanding Convertible Notes, our net (loss) profit for the period decreased 238.9% to a net loss of $22.1 million in Q1 2011, compared to a net profit of $15.9 million for the same period in 2010.

Cash flows from operating activities of continuing operations: Cash flows from (used in) operating activities before movement in timber holdings, measured at cost increased from a cash outflow of $5.3 million to a cash inflow of $247.4 million, mainly as a result of a decrease in trade and other receivables.  Net increase of timber holdings increased from $116.7 million to $368.9 million, resulting in net cash flow used in operating activities being relatively unchanged from the same period in 2010.

Expenditures on Timber Holdings and Manufacturing Subsidiaries

Management will review its planned acquisition pace and report changes to the original plan in the coming months. These projected expenditures will be adjusted as necessary based on several factors, including some that may be beyond our control such as changes in the macroeconomic environment in the PRC.  However, the replanting of 200,000 hectares in the next two to three years will remain a top priority.

Response to Muddy Waters' Allegations

The allegations and attacks launched by short-seller Muddy Waters have had a significant impact on the Company. As stated in the Company's press release of June 6, 2011, Sino-Forest believes the allegations are inaccurate, spurious and defamatory. However, due to the substantial impact the report has had on the prices of the Company's securities and the reputation of the Company, it is the Board's fiduciary duty to address them in a serious and comprehensive manner. The Board is deeply concerned with this situation and the following actions have been taken as a result:

• The Board established an Independent Committee on June 2, 2011 to lead a thorough examination of the allegations. The Independent Committee is comprised of three of Sino-Forest's Independent Directors as follows:

• The Independent Committee appointed independent legal counsel to support the Independent Committee in its review of the allegations:
  

• The Independent Committee appointed accounting firm PricewaterhouseCoopers (PwC) on June 6, 2011 to support the Independent Committee to independently review and examine the allegations.
  

• On June 7, 2011, the Company requested that the Toronto Stock Exchange and the Investment Industry Regulatory Organization of Canada investigate the trading of the Company's shares by Muddy Waters, LLC and its principal Carson Block and anyone associated with these persons in advance of the issuance of the Muddy Waters' report.

• On June 8, 2011, the Company confirmed that the Ontario Securities Commission (OSC) had opened an investigation into matters involving Sino-Forest and stated that it welcomed the investigation. The Company believes that the issues the OSC will seek to address will be consistent with the investigation commenced by the Independent Committee.

Commenting on the situation, Mr. Allen Chan, Chairman & Chief Executive Officer said, "We are very disappointed for our stakeholders about the significant drop in the value of their investment in Sino-Forest due to the inaccurate and unfounded allegations reported by Muddy Waters, a self-serving short seller. It is shocking that a little-known short seller, who is not listed with the Ontario Securities Commission nor the Securities Exchange Commission as a registered advisor, could reduce so much market value created after 17 years of hard work and global stakeholder investment."

Mr. Chan continues, "In our recent news releases, we have stated that we stand by our audited financial statements. I can promise investors that the allegations contained in the report against Sino-Forest are inaccurate and unfounded.  All material related party transactions are appropriately disclosed in our financial statements.

As Chairman of the Independent Committee, William Ardell said, "We have assembled a strong team of independent advisors who are working diligently to complete this examination. At this time, given that our business is primarily based in China, it is anticipated that the examination will take considerable time to complete. As a result, the Independent Committee does not expect to be in a position to provide a complete report on the findings of the examination for two to three months, at minimum. We appreciate the support and patience of our stakeholders during this time."

CEO Video

Mr. Allen Chan has pre-recorded a video message to shareholders in response to the recent allegations that is available on Sino-Forest's website: www.sinoforest.com

Outlook

Mr. Chan concluded, "Undoubtedly, Sino-Forest's business will be affected in the short term, as the Company will be devoting much of its resources to work with external professionals in Canada, Hong Kong and mainland China, including independent accounting firm Pricewaterhouse Coopers LLP, to examine the allegations made in the report issued by short seller Muddy Waters, LLC.  Given the negative impact, management expects the pace of tree acquisition to be adversely affected."

"Despite this unfortunate situation, we will continue to focus on our business strategy of expanding operations. With $1.1 billion in cash and $3.6 billion of standing timber assets, Sino-Forest can continue its growth through acquisitions and through sustainable long-term replanting without accessing the capital markets.  The outlook for China and its forestry sector remains positive for 2011 as the country continues to benefit from relatively strong economic growth, driven by broad-based industrialization and massive urbanization.  At our May 30, 2011 annual shareholders meeting, we indicated our intention to target an annual wood fibre output of 30 million m³ by 2013 after we sold 17.6 million m³ of fibre last year.  We remain confident that we can achieve this compound annual growth rate of nearly 20%."

"On behalf of Sino-Forest's Board and employees, we wholeheartedly thank our shareholders, bondholders, customers and other stakeholders for expressing their continued support for Sino-Forest at this critical time.  Given our solid, long-term track record and the integrity with which we manage our business, we strongly believe our reputation will be redeemed in due course."

Notice of Conference Call

Sino-Forest will hold a conference call for analysts and investors to discuss its first quarter 2011 results on Tuesday, June 14, 2011 at 8:30 am EST / 8:30 pm HKT.  To listen to the live webcast in a listen-only mode, go to our website under "Investor Relations - Earnings Releases" or click on the following link: http://www.sinoforest.com/earningsreleases.asp

Alternatively, you may join the call by dialing numbers below.

About Sino-Forest Corporation

Sino-Forest Corporation is a leading commercial forest plantation operator in China. Its principal businesses include the ownership and management of tree plantations, the sale of standing timber and wood logs, and the complementary manufacturing of downstream engineered-wood products. Sino-Forest also holds a majority interest in Greenheart Group Limited, a Hong Kong-listed investment holding company (HKSE: 00094) with operations based in Suriname, South America and New Zealand, which is involved in responsible and sustainable log harvesting, lumber processing and sales and marketing of logs and lumber products to China and other countries around the world. Sino-Forest's common shares have been listed on the Toronto Stock Exchange under the symbol TRE since 1995. Learn more at www.sinoforest.com.

Note (1) to the Financial Highlights table: We define gross profit as revenue less cost of sales, plus or minus - for wood fibre operations - the change in fair value of timber holdings less estimated point-of-sale costs.  We present a measure for gross profit because we believe certain investors find this useful in assessing our operating performance.  In addition, we include the fair value change as part of our calculation of gross profit because the fair value change represents a portion of the total gain or loss we will ultimately realize on the underlying assets, and we believe this should be regarded as a component of our core operating performance.  However, gross profit is not a recognized term under IFRS and should not be considered as an alternative to net income or as an indicator of operating performance or as any other measure of performance derived in accordance with IFRS.  Because it is not a measure defined by IFRS, gross profit as calculated and presented by us may not be comparable to similar measures presented by other companies.

Note (2) to the Financial Highlights table: We define EBITDA as operating profit for the year/period after adding back depreciation and amortization, as well as a non-cash component of timber holdings from cost of sales and changes in fair value of timber holdings less estimated point-of-sale costs for the year/period.  We present EBITDA as additional information because we believe it is a useful measure for certain investors to determine our operating cash flow and historical ability to meet debt service and capital expenditure requirements.  EBITDA is not a measure of financial performance under IFRS and should not be considered as an alternative to cash flows from operating activities, a measure of liquidity or an alternative to net income as indicators of our operating performance or any other measures of performance derived in accordance with IFRS.

Cautionary notes: No stock exchange or regulatory authority has approved or disapproved of information contained herein. Certain information included in this news release is forward-looking and is subject to important risks and uncertainties. When used in this news release, the words "believe", "intend", "estimate", "expect", "plan" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words.  These forward-looking statements are based on current expectations. The results or events predicted in these statements may differ materially from actual results or events and are no guarantees of future performance of Sino-Forest.  Factors which could cause results or events to differ from current expectations include, among other things: our ability to acquire rights to additional standing timber, our ability to meet our expected plantation yields, the cyclical nature of the forest products industry and price fluctuation in and the demand and supply of logs, our reliance on joint venture partners, authorized intermediaries, key customers, suppliers and third party service providers, our ability to operate our production facilities on a profitable basis, changes in currency exchange rates, interest rates, and the PRC, Suriname and New Zealand's economic, political and social conditions and government policy, and stock market volatility, Muddy Waters' allegations and related class action suits, and other factors not currently viewed as material that could cause actual results to differ materially from those described in the forwarding-looking statements.  For additional information with respect to certain of these and other factors, see the reports filed by Sino-Forest Corporation with applicable Canadian securities administrators. Sino-Forest Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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SOURCE Sino-Forest Corporation