Standout stocks: Sino-Forest Corp. (TSX: TRE)

Prevailing wisdom says it's tough to make money in the forestry sector these days, but Sino-Forest hasn't had much trouble this past year. The company earned US$111.5 million in profit, and its share price has rocketed since September. Sino-Forest owes its success to a strong position in China, a market in which other Canadian operators have little presence. In fact, Sino-Forest has become the largest commercial forestry plantation owner in that country since Allen Chan and Kai Kit Poon founded the company in 1992.

For most of its history, Sino-Forest negotiated the rights to havestable timber in China, waited for the trees to mature and sold them to dealers. The market has only recently begun to take notice of Sino-Forest's long-term potential, however. China's growth has increased demand for wood and paper products. At the same time, the country is trying to reduce its reliance on imports, making Sino-Forest's position as the largest plantation owner all the more valuable. The company is also in the midst of a transition from reselling timber to processing it into saw logs — a lucrative operation if production costs can be kept down.

The real catalyst for the stock's growth came in September when Sino-Forest entered into a purchase agreement for 100,000 hectares of trees in Hunan province, followed by an additional 300,000 hectares.

Competition for trees has heated up, but it has so far posed little threat to Sino-Forest. Its status as an early arriver makes negotiations run smoothly, and its executive management is well connected: co-founder Poon worked as an engineer for the forestry bureau in Guangdong province for 15 years. Temasek Holdings, the investment arm of the government of Singapore, recently acquired a 13% stake in Sino-Forest, adding further negotiating muscle.

The company was even the target of a potential buyout in January by CVC Asia Pacific and Macquarie Bank. Talks fizzled, but Sino-Forest still remains undervalued given its growth potential, says David Beasley, an analyst with Haywood Securities in Toronto. Beasely expects Sino-Forest to start generating revenue from its saw logs sales in Hunan toward the end of the year, and pegged the stock at $15 with an EPS of $1.02 for 2008, proving that money does grow on trees after all.