Forest Plantations In China Receive Canada Funding

One company's joint ventures with China are mostly profitable, but not without challenges

CHINA grows the trees, Canada raises much of the money, and Taiwan and Japan provide the markets. The people who run Sino-Forest Corporation, which helps plant forests in a country where they are not naturally abundant, live in Hong Kong and Toronto.

This new enterprise, which operates out of Hong Kong and Toronto, bills itself as ``Weyerhaeuser in China,'' referring to the forest-products giant in Tacoma, Wash. Not yet, perhaps, but the company claims there is potential.

But let's back up a bit. Trees in China? ``People in North America think only of natural forests,'' says Allen Chan, chairman of Sino-Forest Corporation, which operates six joint ventures in forest products with state governments in China - owning about 50 percent of each. ``For natural forests, China is not on the top of the list.''

Part of Mr. Chan's job is to persuade potential investors that China has trees to harvest. He has just completed a 10 day tour of Canada and the United States, meeting with executives of Canadian forest product firms and looking for experienced people to help run his forest enterprise back in China. Trees are not the problem, Chan says.

``If you're thinking in terms of plantations - of reforestation - then China is No. 1 in the world,'' Chan says. He adds that vast areas of China have benefited from a reforestation program sponsored by the United Nations and the World Bank over the past 20 years.

``With these plantations, we have had sustained growth and provision of raw materials for wood products,'' he says.

The company's most profitable joint venture project is an 8,600 acre eucalyptus plantation and a mill that turns the trees into wood chips for export. Sino-Forest's holdings are part of a larger 131,000 acre eucalyptus tree plantation in Guangdong province which is known for its warm climate.

The wood chips are sold to Japanese, Taiwanese, and Hong Kong firms, which use them to make particle board and pulp.

Because of the planting programs of the past two to three decades, China now has one of the largest plantations of eucalyptus trees in the world, second only to Brazil.

Perfume from trees

Four of the company's other joint ventures make chemicals from trees. Trees were the original feedstock of the chemical industry in the 19th century before petroleum took over. Plantations of pine, acacia, and camphor trees supply the raw product.

The ``Jiangxi Camphor Joint Venture,'' 55 percent owned by Sino-Forest, extracts various products from camphor trees that are used to make perfume among other things. This is not the kind of forestry operation Canadians are used to.

``It's so different from anything else that we've dealt with,'' says Ross Hay-Roe, forest products analyst with Equity Research Associates based in Vancouver. ``The things they're doing with eucalyptus trees and taking the essence of perfume from trees are things I never thought about.''

There are other differences about this venture as well. China is far from a perfect model of a market economy, and while the country has its advantages such as cheap labor and a ready market, some essential business ingredients are missing which developed economies take for granted.

``There's a lot of potential there, given the availability of men [labor], materials, and markets,'' Mr. Hay-Roe says. ``All they need is money to put it together.''

The camphor factory is a perfect example. ``Jiangxi Camphor Factory is operating at approximately 20 to 30 percent capacity due to a shortage of working capital,'' a company document states.

Chan says he hopes he has solved the money problem with his Canadian connection. The firm has raised $6.7 million (Canadian; US$4.9 million) in Canada and is listed on the Alberta Stock Exchange and the Canadian Dealing Network, the Canadian version of NASDAQ.

Another problem is China's infrastructure. The company's five joint ventures in Jiangxi province are being computerized, but it is difficult to build a network with a primitive phone system.

``The job is easier because the province [local government] is our partner,'' says K. K. Poon, president of Sino-Forest.

Canadian capital

How did China make this Canadian connection? ``We were introduced to it through our accountant, Ernst & Young, in Hong Kong,'' says Chan, a Hong Kong national who started working in China as a consultant for Bechtel, the giant engineering firm. He branched into other areas, starting joint ventures with hotels and ``turning around Chinese companies in return for equity.'' Sino-Forest was one of those firms.

``We knew Canada was famous for forestry resources and technology,'' Chan says. ``But ... before Tony [Tsoi, one of the Canadian partners] spoke to us, we didn't know we could access Canadian capital markets. We were excited because we could have both capital and technology.''

Sino-Forest would like to build a modern plywood plant to make finished products rather than export the raw material to Japan and Taiwan. ``Demand for plywood is so strong in China [that] people pay cash in advance for the product,'' Mr. Poon says.

``The company is already quite profitable. It made $1.4 million last year [on sales of $18 million] and will make $4 million this year [on sales of $36 million],'' says John Thompson, partner of the Toronto-based firm of Gornitizki Thompson & Little, which arranged the Canadian financing. ``Most of the profit comes from the eucalyptus chips.''

Sino-Forest says it hopes to make money from Acacia trees, which produce gum, as well as the hardwood eucalyptus. Neither species of trees can grow in Canada's climate.

Over the next decade, the company also hopes to build China's first integrated forest products group or, as it says in its literature, the Weyerhaeuser of China.