The right place, the right time and the right sector
We believe that supportive government policies, high barriers to entry and a
favorable supply/demand picture now make investing in China’s forestry sector
particularly attractive. While many investors are excited about water treatment and
alternative energy companies as environmental plays, we think the forestry sector
remains mostly overlooked. We initiate on this sector with an Overweight.
A unique window of opportunity
The government officially opened the market for private sector participation in
2003. Furthermore, it is providing support in areas such as interest subsidy, tax
and levy exemptions. On the other hand, large capex and the importance of
industry know-how and connections have created high barriers to entry, which
should leave plenty of room for the existing players to grow, in our view.
Favorable supply/demand picture
Surging domestic as well as international demand for wood products has made
China the second largest forest product importer in the world. We don’t believe
that such a significant supply/demand imbalance can be addressed in the
foreseeable future especially given the material tightening of logging quotas at
some key wood exporting countries because of ecological concerns.
Full of environmental angles
The forestry sector is eligible for Clean Development Mechanism (CDM)/carbon
credit trade under the Kyoto Protocol. Furthermore, biomass alternative energy
production based on wood and new tree species is gaining momentum around
the world. Lastly, development of Fast Growth High Yield (FGHY) plants is viewed
as a key solution to the world’s endangered forestry resources. Most of these
have not yet been factored into our models and should provide exciting potential
upside.
Winners/losers and risks
We favor upstream players, industry consolidators and vertically integrated
operators. We see China Grand Forestry (CGF), Sino-Forest, Samling, Lee &
Man, Nine Dragon, Tak Shun and Yueyang Paper as potential winners. On the
other hand, small-scale pure downstream manufacturers, such as Hung Hing and
Samson could be relative losers. Our top Buy is CGF. Key downside risks to our
bullish view are negative government policy changes, a sharp drop in
global/domestic wood/pulp prices and lack of operating/financial track record of
the listed upstream companies.

Table of Contents
Investment theme ............................................................................. 3
Industry overview.............................................................................. 4
Why are we excited about the sector? ............................................ 9
Who do we like? .............................................................................. 15
Risks.................................................................................................. 18
Appendix A: Kyoto Protocol and CDM .......................................... 19
Appendix B: Key forestry countries’ policies overview................ 21
Appendix C: 11th five-year plan targets.......................................... 24
China Grand Forestry ...................................................................... 25
Lee & Man Paper ............................................................................. 46
Sino-Forest Corporation ................................................................. 48
Samling Global ................................................................................ 54
Nine Dragons ................................................................................... 56
Tak Shun Technology...................................................................... 58
Yueyang Paper ................................................................................. 60