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Orient Paper: Story Behind 'Fraud' Report

I am certainly not going to describe this as a deliberate act of deception, however, it seems that a simple phone call to the company to clarify the name of its operating subsidiary would be easy and take only a few minutes. When I call the chairman of ONP, I can reach him on his cell phone day or night and he is always responsive. If I were too lazy to call the company directly, I would probably have referred to the 10-K, which states clearly that "Hebei Baoding Orient Paper Milling Company Limited is the Chinese operating subsidiary" of ONP.

The report also goes on to compare ONP to several public companies such as Shandong Chenming (Ticker:HKG 1812), which has a market cap of over 30 times that of ONP, as well as Nine Dragons Paper (Ticker:2689), which has a market cap of more than 70 times that of ONP. The authors of the report seem shocked that ONP is not operating at the scale of these companies and that ONP seems outdated in comparison.

This is like comparing Home Depot to the corner hardware store. If I wanted to buy into large-cap stocks, I would buy into large-cap stocks, but in my experience I have made more money by buying into small-cap stocks with room for growth rather than in buying the massive global-scale players who have little room for exponential expansion. The individual production lines at these companies likely cost more than the entire market cap of Orient Paper, so showing pictures of these companies for comparison strikes me as a bit silly.

As a result of all of this confusion, I bought quite a few shares of ONP today. Prior to this report, the shares were consistently trading at around $9. Even with the selloff in the overall market I expect a rapid bounce in the share price back to at least $8, with the potential for more upside as ONP reports results. Today, ONP reiterated 2010 guidance of $1.21 per fully diluted share in 2010, which places them at a current multiple of around four times earnings solely due to a single report based on erroneous data. ONP shares closed at $5.09 Thursday, down $1.59, or 23.80%.
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