ONP Is Doing All the Right Things

By Eric Jackson
RealMoney Contributor
7/23/2010 12:45 PM EDT
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Over the past five days, Orient Paper's (ONP - commentary - Trade Now) stock price has dropped 31%. Over the past month, the stock price has plunged 51%. Obviously, this has generated a lot of pain for long holders of the stock, including me.

Research organization Muddy Waters has made many allegations against the company. Based on ONP's response and my research, I do not believe these allegations to be true. ONP published a detailed response to Muddy Waters' allegations on July 6. In that response, ONP answered questions on: (1) its use of the proceeds from two prior placements, (2) its reasoning for purchasing a new 360,000-ton corrugating paper line, (3) the consistency of its SEC and Chinese securities filings, (4) its top 10 customers, (5) its transportation logistics, (6) its inventory turnover and (7) its gross margins. If you haven't read the response, I would urge you to do so and judge for yourselves which side has a more convincing argument.

After its written response, ONP held a conference call with investors to discuss its rebuttal of Muddy Waters' allegations. I dialed in and asked a question of management. Neither Muddy Waters nor any other critic of the company called in.

Furthermore, since the company's detailed response on July 6, Muddy Waters has only made two additional comments. On July 13, Muddy Waters asserted that the new production line being built by Qinyang for ONP was vastly overpriced. This new assumption was based on a phone call allegedly conducted by Muddy Waters with a Mr. Zhang, who is the head of sales for Qinyang.

Muddy Waters had speculated in its original June 28 allegations that Qinyang might not be building a machine at all. It based this assumption on previous phone calls to Qinyang, in which it claimed to have spoken with someone there and discovered that most machines built by Qinyang cost less than the $27 million being paid by ONP.

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