OneBillionChinesePeopleCantBeWrong:ONPisaFraud July22,2010 Asofthetimeofpublication,90.7%ofrespondentstoanonlinepollconductedby Sina.com.(Nasdaq:SINA)believethatONPiscommittingfraud. (http://survey.finance.sina.com.cn/result/48540.html) Thepollfollowsthepublicationofanarticlebythe21stCenturyBusinessHerald (21CBH),whichisoneofChinasmostrespectedbusinesspublications.Thearticle details21CBHsowninvestigationintotheclaimsMuddyWaters,LLCraised.The article,whichhasbeenrepublishedonSina.comandSohu.com(Nasdaq:SOHU), appearshereinChineseonSina.com: http://finance.sina.com.cn/chanjing/gsnews/20100722/04168341604.shtml Weprovideaninhousetranslationofthearticleherein.

in.21CBHsinvestigation uncoveredthefollowing: Accordingtoataxbureauinsider,theAICfinancialsONPprovidedto investorsinresponsetoMuddyWatersLLCsallegationsoverstateHBOPs profitandtaxespaidbycloseto400%.ThismaynowbefraudonthePRC sideaswell. HBOPslargestsupplier,DongfangTradingCo.Ltd.,isashellcompanythat hasvirtuallynorecordedrevenuethepasttwoyears.Thiscompanywas foundedbyChairmanLiuandLiChen.Mr.LiwasadirectorofONPuntil 2009.DongfangTradingsaddressisthesameasONPsprimaryplant.The articlepointedoutthatONPhasneverdisclosedthatitspurchasesfrom DongfangTradingarerelatedpartytransactions. Ourthoughtsarethathavingasupplierthatisacaptiveshellcompanymakes iteasiertoproducedocumentsthatwouldfooltheauditors.Moreover,we couldneverunderstandwhyacompanyaslargeasONPclaimstobewould purchasefromatradingcompany,therebygivingupapproximately10%in margin. ChairmanLiusresponsetothereportersinformationaboutHBOPhaving overstateditsprofitsandtaxesperthetaxbureausinformationwasto disclosethatHBOPhasaBeijingsubsidiarythathasagreementswithother companiestoreceiverevenue.ChairmanLiuclaimedthatheistheLegal Representativeofthissubsidiary.Thereporterwasunabletofindthe companyintheregistryinBeijing.Norwasheabletofindanycompanyin BeijingthatlistsChairmanLiuasthelegalrepresentative.Asoneofour followerswrotetousOnelieneeds1,000moretocoverup. ManypaperindustryexpertstoldthereporterthatONPsclaimed inventoryturnoveriswellabovewhatisusual. July22,2010 MuddyWaters,LLC Seeimportantdisclaimeratback. Page1

AseniorofficialofChinasPaperManufacturingAssociationstatedthatONPs claimsaboutthecapacityofthecorrugatingmediumlineithasorderedare innowayaccurate.NotethatwerecentlydiscoveredthatONPhad switchedtoadifferenttypeofmachine(withoutdisclosure)inresponseto ourinitialanalysis.Thisfurthersupportsourthesisthatsignificantamounts ofmoneywillbemisappropriatedinthispurchase. ThereporterspokewithoneofONPsnew2009customers,whichisoneof theTopThree.Thecustomersownannualrevenueisclosetotheamount thatONPclaimsitpurchasedin2009.Aswediscussedinourinitialreport,a customersrevenuewouldbeatleasttwotimeswhatitpurchasesfromONP (ifnotmore).Thecompanyrepresentativepartiallycorroboratedthat conclusionbystatingitsfirsthalfpurchasesfromONPwereapproximately 25%oftheannualvolumethatONPclaimedfortheyear. ThereporterconfirmsthatMuddyWaters,LLCdidindeedinvestigatethe correctentity.

MuddyWatersLLCTranslationofthe21stCenturyBusinessHeraldArticle AnInvestigationintotheFinancialMysteriesofAMEXListedOrientPaper Authors:YiPengandWangKang TheelderlypeopleofXushuiNanYingVillageinHebeihaveheardthatONPsboss LiuZhenYongwenttotheUSatthebeginningoftheyeartoringthebell;and becauseofthat,thispapermanufacturingfactorylocatedamongstthefieldswestof thevillagewillsoonstrikeitrich. AsignwiththedeclarationThepapermanufacturingplantshallexpandbyanarea ofmorethan1,000mu(approximately717millionsq.ft.)displayedoutsidethe productionplantgavethevillagersamoreintuitiveinsight.On21July,LiuZhen YongtoldthisreporterGettinglistedwillallowtheCompanytodevelopatrocket likespeed. However,thelistingoftheCompanyhasbroughthimtrouble,atleastfornow.Itall startedwithareportpublishedon28JunebyanAmericanresearchfirmMuddy WatersLLC(henceforthreferredtoasMW). ThereportclaimedthatONPissuspectedofexaggeratingitsprofitlevelsinthepast threeyearsandisalsosuspectedofforgingitstotalassetvalues,inventoryturnover andalsokeycustomerinformation.ONPswiftlyrebuttedMW.AccordingtoChinese mediareports,ONPoncerefusedthepurchaseofMWsreportforwhichtheyasked US$300,000.Bothcompanieshavebeenatawarofwordsonmultipleoccasions eversince. July22,2010 MuddyWaters,LLC Seeimportantdisclaimeratback. Page2

 Afterthereportwaspublished,on30June,ONPsstockpricedroppedgreatly.Asof 20July,ONPsstockpricehascontinuedtofall,withthesharepriceendingat US$5.26thatdaywithafallof7.07%. ThepapermanufacturingfirmthatisestablishedbyLiuZhenYongwasreverse mergedonMarch2007ontotheUSOTCBBmarket.InDecember2009,itwas allowedtotradeontheAMEX,andthismanhailingfromLiuZhuangofXuShui County,LiuZhenYong,rangtheclosingbellthatdayinJanuary2010. ThisreportertravelledonsitetoinvestigateONPsoperationfacilitiesinChina.After verifyingwithrepresentativesfromtheCompany,Idiscoveredthattherearemany dubiouspointsofcontentionregardingONPsactualoperatingincomeandtheir relatedtransactions.Thereexistsagapbetweenthecompanysactualtaxsituation andthefiguresprovidedbythelistedcompany.Theirmainsupplierandthe Companyhavenotdisclosedthattheirtransactionsarerelatedpartytransactions, andthismainsupplierhashadalmostnorevenueforseveralyears. ProfitMystery:MosttaxespaidinBeijing InHebeiProvince,XushuiCounty,southofthecity,aboutthreekilometersdowna villagetownhighwayisoneofthemainmanufacturingplantsofONP.In1996,Liu ZhenYongregisteredHebeiBaodingOrientPaperMillingCo.,Ltd(henceforth referredtoasHBOP).Beforethis,Liuonceworkedinaprintingfactoryforseven years,andthecompanyslistinginformationprovidedalsostatedthatinthelate 1980s,hewastheDeputyDirectorofaLiuZhuangCastIronFactory. Afterthisin2000and2002,thecompanyseparatelysignedlandagreementswith villagesneighboringitsmainplant(WuJiVillage&NanHeShouYingVillage)to acquireanadditional40mu(approximately290,000sq.ft.)oflandnearbytheland occupiedbytheoriginalprintingfactory.Thisareaoflandisnowthecompanys mainmanufacturingarea.Inaddition,accordingtoLiuZhenYonghimself,The companyhasbuilt80mu(approximately580,000sq.ft.)ofproductionfacilities,in theindustrialareaofthecountyalongJuLiRoad. InthereportpublishedbyMW,whentwooftheirresearchersvisitedthefactoryon 5January2010thisyear,theyascertainedthatthefactorysmachinesareoldand poorlymaintainedandreleasedphotosofthemanufacturingequipmenttheytook. Afterseeingthephotos,apersonworkinginthepapermanufacturingindustry remarkedtothisreporterthatthemanufacturingconditionsinthephotosare similartotheoperatingconditionsseeninthepapermanufacturingfactoriesofthe early1990s. Insharpcontrasttothis,ONPreportedintheirpasttwoyearsannualreportsthat theCompanysrevenueisaroundUS$65.2millionandUS$102million.Accordingto MWsreport,thisisoverstatingtheactualrevenuebymorethan27timesand40 July22,2010 MuddyWaters,LLC Seeimportantdisclaimeratback. Page3

times,respectively.AMEXhasstrictregulationsregardingpastthreeyearsprofits forlistedcompanies. IntheCompanysmaterials,ONPclaimedthatHeBeiBaoDingOrientalPaper MillingCo.Ltd.(HBOP)isitsoperatingsubsidiaryfirminChina,andisresponsible forthecompanysmainmanufacturingbusiness.HBOPsfinancialreportsalso encompassthoseofothersubsidiaries.Therefore,HBOPsprofitsandtaxsituations arethekeytodeterminingwhetherONPfalsifieditsresults. However,evidencegivenbybothsideshasresultedinthematterbeingshroudedin mystery.MWsresearcherhasprovidedthisreporterwithaphotocopyofthe businessinformationchoppedwiththeproprietarysealofXushuiCountyBureauof AdministrationofIndustryandCommerce(AIC)asproofthattheinvestigated targetwasreallyHBOP.Accordingtotheinformationprovided,thecompanys2008 revenuestandsonlyat16.32millionyuan(US$2.4million). ButaccordingtotheAICarchivedfinancialreportsthatONPreleased,its2008 revenuestandsat452millionyuan(US$66.2million),whichisclosetothefigures reportedbythelistedcompany.Tomyknowledge,thisbusinessinformationis providedbycompaniesthemselvesforthepurposeofstatisticsandarchivingwith theAIC. ThisreporterhasgleanedfromataxbureauinsiderthatHBOPsactualfinancial situationhasaconsiderablegapfromwhatisreportedbythelistedcompany. Further,inaXushuiCountyGovernmentEconomicDevelopmentReportreleasedin 2008,HBOPsprofitsandtaxesthatyearfromJanOctstandsat22millionyuan (US$3.2million).Thetermprofitsandtaxesencompassesthecompanysnet profitsandthetaxpaid(MWComment:thisislikelypretaxincomeplusVATtaxes paidonrevenue).However,accordingtotheAICinformationprovidedbythefirm afterthescandalbroke,thecorporateincometaxpaidinthefourquartersthatyear aloneisover20millionyuan(US$2.9million)andthenetprofitsexceed60million yuan(US$8.8million). Whenaskedaboutthediscrepanciesbetweenthetaxfiguresprovidedbythe operatingcompanyandthelistedcompany,LiuZhenYongexplainedoverthe phone,Thesalesofthecompanysproductsarelargelyconductedbyanother subsidiarycompanylocatedinBeijing.Inthesamephonecall,LiuZhenYong sharedthefactthatthecompanysproductsarenowmanufacturedmainlyinsix places,apartfromthetwofactoriesbelongingtoOrientHBOP,therestare dispersedinvariousdistrictsandcountiesofBaodingCity,andeventhoughthe companydoesnotownanysharesinthosecompanies,thereisanagreementto receivesharesoftheirprofits. Ifsuchauniquenetworkofrelationshipsindeedexists,thenthenexusliesina companycalledBeijingOrientPaperSalesCompany.AccordingtoLiu,thelegal representativeofthatcompanyishehimself,anditisregisteredinBeijings July22,2010 MuddyWaters,LLC Seeimportantdisclaimeratback. Page4

Chaoyangdistrict.Itconductssalesfortheproductsproducedbythe abovementionedsixmajormanufacturingareas,andhelpsHBOPaccruesomeofthe profitsfromtheothermanufacturers.Assuch,Themajorityofthecompanystaxes naturallyispaidinBeijing.InAugust,theBeijingcompanywillevenholdanevent. Liusaid. Afterhearinghimspeak,itwouldseemthatwecouldputthemattertorest. However,whenthisreportercheckedtheinformationnetworkprovidedbythe BeijingAIC,thereisnocompanyregisteredwiththeaforementionedname,noris thereanycompanyintheregistrythatevenhasthetermOrientPaperinitsname. (MWComment:thesametwoChinesecharactersrepresentOrientandOriental.) WhencheckinglegalrepresentativesregisteredwiththenameLiuZhenYong, therearenocorrespondingrecordsofthesupposedcompanyeither. BusinessMysteries:Equipment,Inventoryandtheir10MajorClients Evenmorebusinessoperationaldetailsareputtothetest. MWsuspectsthatONPexaggerateditsproductioncapabilitiescorrugatingmedium paperlinethatitisbuying.AccordingtoMWsreport,theyhavespokentoan anonymousfactoryworkerinthefactoryproducingtheline,andhehasrevealed thatthebestmachineinthefactoryisonlycapableofproducing150,000tonsof productannually,atpricesofaroundUS$4.4million. On1July,ONPrespondedsayingthatthecorrugatingmediumpapermanufacturing productionlinepurchasedbythecompanyiscapableofproducing367,000tonsof product.ThisequipmentproducedattheHenansupplierisvaluedatUS$27.8 millionandisusedtomanufacture5.6meterswide,120g/squaremeter corrugatingmediumpaper. AccordingtofiguresreleasedbyONP,thismachinecanproduce1,200metersofthe abovedescribedproductperminute.MWhoweverthinksthattheactualfigures shouldfallwithinthemorereasonablerangeof500600metersperminute. Bothpartieshaveuncompromisinglyheldfasttotheirviewsonthepricingand productioncapability.Thisisbecauseitconcernsthefiguresreportedbythelisted companyregardingitsassessmentofitsfixedassetsandtheirfiguresonits operationperformance. AprovinciallevelbranchleaderofChinasPaperManufacturingAssociationtold thisreporter,Usingcurrentexistingdomesticproductionequipment,ifitwereto produce1,200metersofcorrugatingmediumpaperperminuteandkeepingitat5.6 meterswide,thereisnowaythatathicknessof120g/squaremetercanbe achieved.Itismorelikelytobeatathicknessof90g/squaremetersorless. July22,2010 MuddyWaters,LLC Seeimportantdisclaimeratback. Page5

Atthesametime,theexceedinglyhighinventoryturnoverratesquotedinONPs financialstatementsdifferfromtheratesmorecommonlyobservedwithinthe industry.AccordingtoMWsreferenceoftheirfinancialreports,ONPs2009 inventoryturnoverratewasashighas16.85,whichmeansthefirmisabletoclear outabatchoffinishedgoodsandhalffinishedgoodsinlessthanonemonth.Thisis incontrasttothegeneralindustrycycleoftwotothreemonths,unlesstheyare manufacturingcashnotes,medicalpaperorotherspecialusepaper,asmanypaper manufacturingindustryexpertsrevealedtothisreporter. Forexample,thecompetitorslistedinONPsfinancialreports,ShanDongChen MingandNineDragonsinventoryturnoverratethatyearare4.29and7.67 respectivelyonly. Inaddition,inONPsfinancialreports,theirTop10Customersin2008and2009are alsolargelydifferent.Ofthe10majorcustomersthatmadethelistin2008,onlytwo madethelistagainin2009.Assuch,MWsreportsuspectsthatfalsificationshave beenmade.Checkingagainstinformationmadepublic,thereportsclaimthatthe totalrevenuesannouncedbysomecompaniesaretooclosetothetransaction figuresannouncedbyONPringstrue. Thisreporterhasmadespecialefforttofindoutmoreaboutoneofthecompanies thatnewlymadethemajorcustomerlistin2009(withintheTopThree).This enterprisehaspubliclyannouncedrevenueofabout40millionyuan(US$5.9 million)inthemostrecentyear,butinONPsfinancialreport,theirtransactionwith thecompanyisalmostclosetothe40millionyuan(US$5.9million)figure.Ican onlysaythatwedidcooperatewithONP,andfromwhatIcanrecall,thefirsthalfof theyearwehadtransactionsamountingtoabout10millionyuan,(US$1.5million) therepresentativefromthisfirmtoldthereporter. TheBiggestRawMaterialSupplier Intheupstreamchain,thisreporterdiscoveredthatacompanynamedXushui CountyDongfangTradingCo.Ltd(henceforthtermedDongfangTradingCo.Ltd), accordingtoONPsfinancialreport,thiscompany,witha(Chinese)namesimilarto theCompanys,hasbeenONPslargestrawmaterialssuppliersince2006. Inthethreeyearsfrom2007through2009,thiscompanyssuppliershareisat levelsof53%,50%and37%,respectively. Informationshowsthatthiscompanywasestablishedin2001,registeredatXushui CountyAIC,anditsmainbusinessiswastematerialcollection.Intheapplication informationprovidedintheearlystagesofstartup,thecompanyregistration addresscontainedfivehouseslocatedinXushuiCountyNanHeShouYingVillage West,anditalsocomeswithleasecontractssignedwiththevillagecommittee. July22,2010 MuddyWaters,LLC Seeimportantdisclaimeratback. Page6

Thiscompanysinitialregisteredcapitalwas500,000yuan($60,500atthetime), withtwoshareholders.ThefirstshareholderwasLiuZhenYong,thesecondwasLi Chen.LiChenoncewasaDirectorofONPbutresignedfromthepostin2009.In ONPspublisheddocuments,hisdrawnsalaryfromONPwasUS$4,826in2008and US$4,093in2009.LiChennowholds201,164ONPshares,whichis1.1%ofshares offered. NotlongafterDongfangTradingCo.Ltdwasregistered,thelegalrepresentation wastransferredfromLiChentoamannamedLiJianJunandequityroseto500,000 yuan.Fromwhatthisreporterunderstands,LiJianJunisanativeofXushui.Also, DongfangTradingCo.LtdandtheHBOPfactoryaddressareinthesameplacein NanHeShouYingVillage. DongfangTradingCo.Ltdinthemostrecenttwoyearsalmostdoesnthaveany revenue,theaforementionedtaxbureauinsiderinformedme,Itsjustlikeashell company. Myownershipwaswithdrawnin2004,LiuZhenYongresponded.Duringour conversationhedidnotelaboratemuch,throwingoututterancessuchasLiJianJun comesfromBeijing,ThisisaBeijingcompany,andApartfromthiscompany,we havesuppliersfromotherplacessuchasBeijing. Withregardstothesetroublescausedbythecompanyslisting,hefirmlybelieves thatSomepeoplehaveulteriormotives. AccordingtotheAICinformation,evenbeforethethreeyearfinancialreviewtoget listedonAMEX,LiuZhenYongspapermanufacturingplanthasannouncedcloseto 100millionyuan(US$15million)outputvalueforseveralyearsrunning,andis recognizedbythegovernmentasakeyenterprise,anhonorthatisbestowedonly uponenterpriseswithtaxesofmorethanonemillionyuan(US$150,000).Formany years,thisenterpriseisconsideredafamoushighenergyconsumerenterprisein thatregion. ONPannouncedon20JulythattheyhavealreadyhiredanAmericanlawfirmto workcloselywiththeindependentauditcommitteeannouncedonthe16th,to jointlyreviewthisincidentcausedbyMuddyWaters.

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Asofthepublicationdateofthisreport,MuddyWaters,LLC(possiblyalong withorthroughourmembers,employees,and/orconsultants)hasashort positioninthestock(and/oroptionsofthestock)coveredherein,and thereforestandstorealizesignificantgainsintheeventthatthepriceofthe stockdeclines.Followingpublicationofthisreport,weintendtocontinue transactinginthesecuritiescoveredherein,andwemaybelong,short,or neutralatanytimehereafter. MuddyWaters,LLChasobtainedallinformationcontainedhereinfrom sourceswebelievetobeaccurateandreliable.However,suchinformationis presentedasis,withoutwarrantyofanykindwhetherexpressorimplied. MuddyWaters,LLCmakesnorepresentation,expressorimplied,astothe accuracy,timeliness,orcompletenessofanysuchinformationorwithregard totheresultstobeobtainedfromitsuse.Allexpressionsofopinionare subjecttochangewithoutnotice,andMuddyWaters,LLCdoesnotundertake toupdateorsupplementthisreportoranyoftheinformationcontained herein.

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