fmede (< 20)

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Orient Paper - Cloudy waters?

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July 28, 2010 – Comments (14) | RELATED TICKERS: ONP

I'd be interested to know other opinions about Orient Paper. The stock from this chinese company declined almost 20% today as Roth Capital said they would suspend their coverage of the company until an audit is completed to determine the veracity of allegations of fraud. The allegations of fraud came a while ago from a newly formed research company named Muddy Waters who published their FIRST analysis ever on any company and said that ONP is a fraud and overstates earnings. It is interesting to note that MW disclosed to be shorting the stock by the time they emitted their report. More interesting is that MW is formed by only two people - one lawyer and one "analyst" with a BS at USC... The fraud allegations were supported by an anonymous blogger at Seeking Alpha and provoked more selling...

Before the fraud allegations, Roth Capital had a buy rating with target of $16 for ONP. So, if the company is a fraud, is Roth Capital so easy to fool???

On the other hand, cases of fraud in small chinese companies do not seem to be rare and it appears to me that management has been acting slowly to dismiss the accusations...

So, are ONP waters really cloudy???

DISCLOSURE: I went long ONP on CAPS today but have not added real money yet (probably shoud have done that today)...

14 Comments – Post Your Own

#1) On July 28, 2010 at 9:34 PM, JaysRage (95.34) wrote:

At first I was pretty convinced that the Muddy Waters piece was a hatchet job. The guy on Seeking Alpha wasn't any better, but I've read a few more articles from more independent sources, and I was surprised how much smoke there is to some of this stuff.

My gut tells me that this will blow over, but I think the stock could go much lower in the mean time. High risk, high reward on this one. I won't touch it with real money unless it drops even more from here. When they hire the independent auditor, the stock will skyrocket. If the auditor validates their financials, they are EASILY a $10+ stock.....and $15 is reasonably obtainable

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#2) On July 28, 2010 at 9:40 PM, simplemts (< 20) wrote:

My personal opinion, I do not believe the company to be a "total fraud". Why I have those two words in quotes are the following reasons:

1) I do not believe the company to be a fraud at all. The company has provided thorough responses to all allegations, conducted a conference call, and been VERY open with onsite visits by investors and analysts.

2) As with many early stage aggressive growth companies, an earnings restatement would not surprise me either. I do not consider this a "fraud" but simply that many young fast growing companies do not have the best internal controls, high grade auditors, etc. in the beginning. These have all been upgraded and updated over the last year as the company has expanded quickly and been able to tap the capital market in the US.

On the 3rd or 2nd day after the MW report came out, the stock dropped to the $4s and $5s. I bought at $4.75 and $5.6. The next day, Eric Jackson came out with a positive response and I sold at $7.47. I made a 40% profit in a single day and was very happy with my trade.

Today, on news that Roth is no longer involved with an active recomendation the stock dropped 20%. I bought again today, at an averge price of $4.46. I would like to establish this as my core investment and not trade it like I previously did (although, if it pops 40% tomorrow I will probably sell too :))

Why am I investing... because I think at worst you get .80 earnings instead of .90 or some other minute difference from what was reporrted. The CEO is fighting very hard and doing his best to be very transparent. Watch this video to see a very thorough display of the company's headquarters and manufacturing lines:

http://wsmco.com/show.aspx

It will default to CMFO's video, just click the video of ONP.

In this video I saw a LARGE amount of scrap paper, warehouse full of manufactured paper, paper going both in, and out, of the facility, and a very nice headquarters building. I also saw 50+ vehicles and dozens of workers (a strong rebutal to MW who says 4 workers were sitting around on the ground).

Disclosure: Long ONP

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#3) On July 29, 2010 at 2:45 AM, ralphmachio (28.46) wrote:

The company itself MAY BE purposefully controlling it's own bad press for high volatility trading, and putting itself on the map for the future when or if it gets validated. or not. Bad press is cheap good press, if it is untrue. Otherwise who would even care about ONP?

Disclosure: Was long ONP for about two hours today. It was boring compared to previous trades, but made money. Thought REAL hard about overnight hold, but didn't feel that adventurous, and it had a boring close. Thank God for stocktwits, or I'd never even know this volatile stock existed.

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#4) On July 29, 2010 at 10:04 AM, Euro247 (99.63) wrote:

Nice 10% gain this morning, based on their preliminary financial results. Bought in at 4.18 looking to sell in the mid 5's

Near term very bullish.

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#5) On July 30, 2010 at 3:57 AM, bdescent (69.18) wrote:

Low float and high sentiment equals high volitility. Weak hands just keep getting flushed out due to a first time report by Muddy Waters? No iron clad statements but a huge drop in the process. Remember the Textron rumor perpetrated by the rich Arab that they had sold the Cessna division? He's no longer alive now so who knows Muddy Waters may not last long either. It just seems so unfair that shorts have so much easier a job on their pump and dumps than the longs albeit they are much lessor in number. BTW I'm starting a new analyst company called Bird Droppings and am looking for a 32nd cousin to place my shorts so they can't be traced LOL.

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#6) On July 30, 2010 at 12:11 PM, ibitegirls (< 20) wrote:

Even if the report is false the damage has already been done and a lot of investors have been scared off. I personally think Black Waters is doing this just to make money and doubt their findings because of the profit they are trying to make by shorting the stock. If they were serious why would they attempt to make a profit? Something is really fishy.

Regardless, this is not a long term investment until the investigation is finished and I would only day trade this stock and sell it before the market closes.

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#7) On July 30, 2010 at 4:30 PM, simplemts (< 20) wrote:

"Regardless, this is not a long term investment until the investigation is finished and I would only day trade this stock and sell it before the market closes. "

Haven't you heard of buy low sell high? Buy the rumor, sell the news?

If you wait for the "all clear" this thing will be back above $8 already.

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#8) On July 30, 2010 at 4:34 PM, aapries (60.70) wrote:

ONP is not a fraud. About most of the allegations are opinions or distortions of the truth. The company offered themselves to be audited. I don't remember Bernie offering himself to be audited by an independant third-party. If they were a fraud, the CEO and other executives would have sold their stock right when all this started (similar to Enron's executives).

The fact that the CEO has NEVER sold a share since he opened the company speaks a lot about his integrity and commitment to this company. The fact that Muddy Waters "research reports" are mostly opinionated and filled to the gills with legal disclosures tells me a lot about their intentions.

I think it's amazing how they can be so successful at destroying other people's investments (most importantly the CEO who started this company in 1996). One VERY lousy report basically threatens 14 years worth of work.

On the other hand, when all this is over, it will be very funny looking back. I reread the part in the Muddy Waters report that says how they poured over the financials at an airport while eating pizza. The best one is that one of them thought a 10-K was a race!! A "research company" actually wrote that in their inaugural report!!

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#9) On July 30, 2010 at 4:34 PM, simplemts (< 20) wrote:

All one needs to do is think of risk/rewards at today's price:

Risk: Fraud... the company is delisted, sued, and may ultimately shut down. Likely loss between 30-100% (Most likely somewhere in the middle)

Reward: Recent estimate of .28 for Q2 with future capacity expansion and high demand. Likely to earn almost 1.20 in 2010, and 1.50 in 2011. At an 8 P/E multiple, price would be around $12. This is almost a 300% gain.

Risk: 55% loss; Reward: 300% gain.

At today's price, I like the balance between risk reward. Would I be a buyer at $8... no. But near $4, definitely have been!

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#10) On July 30, 2010 at 7:48 PM, fmede (< 20) wrote:

I bought shares today. I find it hard to believe that they would have reported a gain for the past quarter knowing that the company will be under scrutiny now.

It is amazing how good news on earnings were completely offset by short-sellers who believe or take advantage of a single report from a recently formed research company without any credibility. The more I think about it, the more convinced I am... As simplemts said, the potential rewards outweigh the potential risks...

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#11) On August 03, 2010 at 5:08 PM, simplemts (< 20) wrote:

Up over 10% already, nice fmede. =) Further appreciation expected in the future too.

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#12) On August 04, 2010 at 5:48 PM, fmede (< 20) wrote:

Simplements, I guess the MW guys are probably already long at this time and laughing at the ones who sold at $4

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#13) On August 04, 2010 at 8:10 PM, simplemts (< 20) wrote:

Reminds me of CFSG, dropped from $10 to $3.50, only to rise to $18. I'm hoping ONP does the same too! (not drop to $3.50, but rise to $18 ;))

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#14) On August 07, 2010 at 8:47 PM, fmede (< 20) wrote:

It looks like that the Muddy Waters' allegations were really just a scam and a plan to make money shorting ONP... They have removed their research papers from the website and do not even mention it anymore... Further, the website does not even mention who is involved with the company anymore...They are probably on vacation in Caribe right now...

www.muddywatersresearch.com

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