Carlyle backs China Forestry despite damning report

A Carlyle spokesman told Bloomberg that private equity firm's believes China Forestry is stabilizing and recovering. It plans to remain a shareholder. Carlyle Asia Growth Partners III invested $55 million in China Forestry in two transactions from January 2008 and it held a 10.96% stake at the end of the 2010. Partners Group invested $30 million alongside Carlyle and has a 5.4% stake.

China Forestry admitted last week that it has records of only RMB8.8 million ($1.39 million) in revenue for the three years through 2010, far lower than the RMB2.4 billion previously disclosed.

A probe last year resulted in a Hong Kong court freezing HK$398.2 million ($51.2 million) in assets held by Li Han Chun, China Forestry's CEO. He was later detained by the Chinese authorities for the alleged embezzlement of RMB30 million ($4.7 million). A subsequent investigation found that Li and his team had been using the sales proceeds from China Forestry's primary mainland subsidiary to buy forest assets from farmers and to cover operating expenses related to harvesting activities. They falsified all the records to deceive the auditor.

China Forestry's disclosed assets rose from RMB1.4 billion in 2007 to RMB9.6 billion in 2009 but Li's activities led to a RMB2 billion write down the following year as the company posted a RMB2.7 billion loss. In 2011, the net loss widened to RMB4.19 billion as sales dropped 63% to RMB392.3 million. China Forestry has $180 million in bonds outstanding and $119.3 million in cash as of December 31. Acting CEO Li Jian resigned on April 15.

The situation isn't helped by a lack of clarity over land ownership. Several years ago China's forestry bureaus embarked wanted to raise funds and this resulted in land use rights being sold off relatively cheaply. This brief window of opportunity distorted the forestry business model and companies, under pressure to boost assets, responded by approaching individuals who were awarded land use rights as part of the privatization drive. There is no central land registry with details of who owns what.

Toronto-listed Sino-Forest has run into similar problems. Short-seller research firm Muddy Waters claimed the company had overstated its revenues and assets by routing funds off its books to intermediaries in order to fabricate sales transactions, causing its share price to plummet.

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• Topics
• Greater China
• Regulation
• Expansion
• Industry best practice
• China
• regulation
• The Carlyle Group
• Partners Group