Orient Paper (NYSE AMEX:ONP)

The Muddy Waters Research report has made some bold claims, basically purporting that ONP is a major fraud.  The report begins:

"We are confident that ONP is a fraud.  Its purpose is to raise and misappropriate tens of millions of dollars.

-Approximately $30 million has been misappropriated since October 2009.
-ONP overstated 2008 revenue by 27x
-ONP overstated 2009 revenue by approximately 40x
-ONP's claims about its top 10 customers support our fraud conclusion
-ONP overvalues its assets by at least 10x
-The value of ONP's production lines is greatly overstated
-ONP's inventory is overstated by millions of dollars
-ONP's claims of inventory turnover of 32.5x and 16.8x in 2008 and 2009, respectively, are without credibility when compared to those of China's industry leaders, which range from 4.3x to 7.7x
-ONP overstates its gross profit margins by hundreds of basis points."

The rest of the report can be found here.

ONP quickly responded to these allegations in a press release:

"The report issued by Muddy Waters contains many inaccuracies, omissions, fabrications, and unsubstantiated claims with a purpose of having the reader draw a conclusion that "ONP is a fraud" whose "purpose is to raise and misappropriate tens of millions of dollars." Orient Paper categorically denies these allegations and has instructed its legal counsel to contact Muddy Waters and explore all legal options against it for publishing and distributing such a report."

The rest of their response can be found here.

Muddy Waters quickly procured a response to ONP's release.  Although they seem confident that their findings are accurate, it is odd that this disclaimer appears at the bottom of their commentary:

"Muddy Waters, LLC has obtained all information contained herein from sources we believe to be accurate and reliable. However, such information is presented "as is," without warranty of any kind, whether express or implied. Muddy Waters, LLC makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and Muddy Waters, LLC does not undertake to update or supplement this report or any of the information contained herein."

Finally, Rick Peasron published an article on TheStreet.com, where he discusses how he and the founders of  Muddy Waters, who were consequently and to his surprise former classmates at the University of Southern California,  had toured ONP's facilities, with video camera in hand.  He begins his article:

"The reason I moved back to China a few years ago was so that I could get the best possible information on U.S.-listed China small-cap stocks.

Days like today [day of Muddy Waters Report] are when that decision really pays off because I got to buy Orient Paper (ONP) at an absurdly low price with a high degree of confidence despite (and due to) a recently released short-sellers' report stating that the company is a fraud."

Rick Pearson's observations, interpretations of the event and video are revealing and are worth the read.

We assume that this story is far from over and are as anxious as all of ONP's investors to find the full truth.  We will post updates as they become available