Investors embrace trees to tap China boom

Investors embrace trees to tap China boom
The Guardian, U.K.
16/11/2007

Hong Kong - Investors looking for new ways to cash in on China's
strong economic growth are turning to its emerging forestry industry,
which is flourishing amid a clampdown on the global trade of
unsustainable rainforest timber.

China is the world's largest importer of soft and hard woods. Total
forest product imports more than tripled between 1997 and 2005 to 134
million cubic metres, accounting for around half the log exports from
Papua New Guinea, Myanmar, Indonesia and Russia.

But with campaigns against deforestation prompting tighter rules on
international trade, a handful of listed logging firms are looking to
exploit China 's 960 million hectares (9.6 million sq km) of forests,
of which only 5 percent is in plantation use.

The fledgling industry is planting fast growing, high-yield trees such
as eucalyptus to feed demand from explosive growth in home ownership
and construction -- and trying to soothe investors by battling
accusations it is harming the environment by using timber taken
illegally or unsustainably from the world's forests.

China's insatiable demand for raw materials has helped push up the
price of commodities from iron ore and palm oil to copper and milk
powder and wood products are no different. Benchmark NBSK pulp prices
have risen more than 30 percent in two years.

Analysts say firms such as Temasek-invested Sino-Forest Corp and China
Grand Forestry Resources Group can cash in on rising demand and tighter
supply.

"With China 's significant imbalance of wood supply, upstream players
should benefit from rising wood prices," said Chuan Tang, an analyst at
Deutsche Bank.

China Grand Forestry, which transformed itself from a garments maker
formerly called Good Fellow Group, has seen its market value balloon
nearly 18 times since the beginning of 2006, when it announced the
purchase of Beijing Wan Fu Chun Forest Resources Development Co Ltd.

"Despite early scepticism, the market now recognises that the
company's earnings model is sound," HSBC's Ken Ho said in a research
report.

China Grand signed an agreement with Lee & Man Paper last month to
supply the container board maker's pulp facilities in China with raw
materials from its fast-growing, genetically modified paper mulberry
trees.
China Grand also agreed this week to pay $820 million for Yunnan
Shenyu New Energy, a Chinese company that plans to make biodiesel from
Jatropha Curcas trees.

DODGY LOGS?

But some analysts say investing in Chinese forestry firms is risky, as
they are small and could be hit by unpredictable changes in government
policy -- common for any nascent industry.

China is just beginning to regulate its forestry industry and detailed
laws are lacking in many areas.
"They're mainly small-caps and investors may see difficulties when
they want to offload the stocks," said Alex Tang, a research director
at Core Pacific-Yamaichi International.

There is also the risk the highly cyclical pulp and timber markets
fall, denting what forestry firms can get for their logs.

Chinese companies also face competition for forestry assets from both
global timber operators and pension funds, which view growing trees as
a good match for their long-term liabilities.

The world's top paper and board producer Stora Enso, which began the
development of plantations in China's Guangxi province in 2002, has
plans to plant a 160,000 hectare forest to support the establishment of
a pulp and paper/board mill in the province, boarding Vietnam. It spent
$37 million buying suitable land for a mill in April.

Morgan Stanley singled out Sino-Forest among its best China materials
plays, initiating coverage of the Chinese forestry and paper industry
with an attractive view.

"Not only do we forecast demand growth for industrial wood to be
robust for many years, but China's dependence on increasingly scarce
imported wood should ensure strong pricing power of at least 10 percent
per year through the end of the decade," Morgan Stanley's Charles
Spencer wrote recently.

Apart from more established names such as Sino-Forest, a clutch of
up-and-coming producers is getting in on the act.

At least half a dozen Hong Kong firms, such as China Timber and
Venture International Investment, have either been bought by forestry
operators or shifted their focus to logging and wood products
manufacturing in the last two years.

They reason that with 42 percent of logging land owned by the state
and the rest operated in deals with local governments, there is plenty
of room for the private sector to expand.

And if their new plantations are eligible for carbon credit trade
under the Kyoto Protocol, that could bring in extra cash.

"This is a sector with great potential, but it's new to many analysts
and involves technical and government regulation requirements, so
investment risks are relatively high," an analyst with a major European
house said.

Firms are also dogged by environmentalist complaints about
deforestation and illegal logging in tropical forests, often far from
China .

Omnicorp Ltd -- which is buying a tropical rainforest in Suriname in
South America -- has insisted it will
practise "sustainable forest management", cutting selectively to
maintain biodiversity.

But another Hong Kong-listed firm, Malaysia-based Samling Global, said
last month one of its units was
fined US$470,000 by the Guyana Forestry Commission for regulation
breaches, including under-invoicing the trees harvested.

The firm denied the allegations and will appeal against the sanctions,
which include the suspension of its sub-contracting operations relating
to the concessions. But the stock has fallen more than 30 percent from
a July peak of HK$3.55. ($1=HK$7.765)

©Guardian (UK)