Saturday, August 28, 2010

Revisiting the Orient Paper Ordeal

By Eric Jackson
RealMoney Contributor

8/27/2010 7:47 AM EDT
Click here for more stories by Eric Jackson

There has been relatively little news out on Orient Paper (ONP - commentary - Trade Now) for the last month or so. This small China-based paper producer jumped into the spotlight at the end of June when a previously unheard-of research firm called Muddy Waters claimed the company had issued fraudulent financial releases. In the wake of the allegations, Orient Paper stock -- which previously had been trading 200,000 shares a day (and, on some days, far less) -- now experienced daily volume of more than 1 million shares.

Several investors with long positions spoke out in favor of the company, while others with short positions stood behind Muddy Waters' allegations. Orient Paper's stock has been unquestionably volatile since the ordeal began, and the action has ultimately brought the price sharply lower. Today, the stock trades in the mid-$4 range, compared with more than $8 earlier in June.

The stock is, of course, cheap on a number of metrics. The trailing price-to-earnings ratio comes to 4.3x, and the trailing enterprise value per earnings before interest, taxes, depreciation and amortization is at 3.9x. However, a cloud of potential impropriety continues to hang over the company. Muddy Waters' allegations were numerous, including the inflation of inventory numbers, issuance of false numbers and diversion of funds from two recent private placements. Like a number of others, I have countered these claims -- and, not surprisingly, the long investors tend to agree with these views, while the short investors do not.

Orient Paper has tried to respond aggressively to the accusations, as well, via press releases and other means. Of course, in its most noteworthy action, the company's board recently authorized law firm Loeb & Loeb to engage an outside Big Four auditor to conduct a full third-party audit of the company. Deloitte was subsequently hired as that auditor.


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