Sino-Forest 2006 Annual Report

8/6/2019 Sino-Forest 2006 Annual Report

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SINO-FOREST

CO

RPO

RATION

ANNUAL

REPORT

2006

GROWINGINSTATURE

ANNUAL REPORT 2006

SINO-FOREST CORPORATION

SINO-FOREST CORPORATION is a

leading oreign-owned commercial orestry

plantation operator in China. The Canadian

corporation began operations in 1994 as

the frst oreign and privately managed

company involved in orest products in

the Peoples Republic o China (PRC).

Its principal businesses include the ownership

and management o orestry plantation trees

and sales o standing timber, wood chips and

logs, and complementary manuacturing o

downstream engineered-wood products.

Its executive ofces are in Hong Kong and

Toronto, and its common shares trade on

the Toronto Stock Exchange under the

symbol TRE.

Note: All amounts are expressed in U .S. dollars, unless otherwise indicated.


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SINO-FOREST

CORPORATION

Why Invest In Sino-Forest ?

China Needs WoodGrowing Demand

Competitive AdvantageGrowing Profciency

Strong Track RecordGrowth throughExperience

China EncouragesForestryGrowth Plan

Broad ReachGeographical andVertical Growth

Benefts to ShareholdersGrowing in Value

Chinas wood fbre defcit is increasing. Currently,35% is imported and the fgure is set to riseto 50%. Sino-Forest is well positioned to helpsustain Chinas rising consumption o timber logsand downstream engineered products.

Sino-Forest is an industry leader, deployingscientifc silviculture techniques and orest-management methodologies that maximiseharvest yields and ensure long-term sustainability.

Sino-Forest has a proven twelve-year track recordoperating in China. The Companys sizeableoperations and its accumulated orestry expertiseserve as a solid oundation or exceptional growthin the years to come.

Chinas eleventh Five-year Plan (2006-2010)aims to protect and restore the environmentwith particular emphasis on orestry development.As a leading oreign-owned plantationoperator, Sino-Forest aims to play a vital role.

Sino-Forest has nearly doubled its plantationbase and expanded its geographical coverageduring the past three years. It now operates inten provinces, deploying integrated operations ranging rom standing timber and wood chipsupply to downstream product manuacturingto capture margins along the value chain.

Driven by a strong management team and soliddemand or wood fbre, Sino-Forests net incomeand earnings per share achieved a compoundannual growth rate o 35% (net income) and21% (diluted EPS) respectively over the pasttwelve years.


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02 Sino-Forest2006Perormance

04 OperationsataGlance

07 ChairmansMessage

10 MarketFactors

13 StrategyandBusinessOperations

17 CorporateGovernance

19 FinancialSection

58 Directors,OcersandExecutives

60 Ten-yearFinancialHighlights61 2006QuarterlyHighlights

62 CorporateandShareholderInormation

CONTENTS


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SINO-FORESTCORPORATION02

2006 2005 2004Trees inventory under management (in hectares) 352,000 324,000 242,000Value of existing forest assets** (millions) 919 729 566Value with perpetual rotation*** (millions) 1,428 968 774Total volume (m3 in millions) 27.4 23.8 16.4Average yield (m3 per hectare) 87 78 73

Source: Pyry

U.S. dollars (in millions, unless otherwise indicated)20062005Change (% ) 5-year CAGR* (%)Revenue645.0493.3 30.7 36.3Gross profit

194.5136.9

42.1 45.1Gross profit margin30.2%27.7%2.5 pts EBITDA 334.3255.930.671.4Net income 111.581.736.4 43.1Diluted earnings per share0.80 0.5934.4 30.7Cash flow from operating activities289.3196.547.386.4Cash and cash equivalents, end of year152.9108.441.0145.9Capital expenditures 416.8 299.7 39.1 55.9Total assets1,207.3895.334.8 33.8Return on equity18.4%17.5% 0.9 pts Shareholders equity 605.7 468.0 29.4 28.5Share price at year end (Canadian dollars)7.83 4.9458.5 47.3Market capitalization at year end 1,080.0681.058.6 62.4(millions of Canadian dollars)Hectares of trees acquired129,276175,214(26.2 ) Hectares of trees sold 111,367108,0133.1 Hectares of trees under management at year end352,000324,000 8.6

* Compound average annual growth rate from 2001 to 2006

Deliveredrecordearningsorthetwelthconsecutiveyearwithnetincomeexceedingthe$100

millionmark,drivenbysolidsalesinstandingtimber

Totalassetbaseexceeded$1billionwithtimberholdingsaccountingorover$750millionatcost,

comparedtoPyrysvaluationo$919millionbasedonasinglerotation

Toplinekeyperormanceindicatorsachieveddouble-digitcompoundaveragegrowthoverthepast

veyears

SINO-FOREST2006PERFORMANCE

SUMMARY OF FINANCIAL DATA

YEARLY FOREST ASSETS VALUATION BY INDEPENDENT CONSULTANTS

**Basedonsinglerotation,aone-oharvestingostandingtimber

***Basedonperpetualre-plantingandcultivationoplantationlandaterharvestingthroughmanyrotationsoveraty-yearperiod,

including400,000hecaresinHunanProvince


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SINO-FORESTCORPORATION 03

RETURN ON EQUITY (%) SHAREHOLDERS EQUITY (millions) TRE VERSUS S&P/TSX COMPOSITE INDEX

0

100

200

300

400

500

600

700

02 03 04 05 06

TRE

S&P/TSXComposite Index

372.

3

245.

0

180.

1

468.

0

60

5.

7

0

100

200

300

400

500

600

700

800

0605040302

14.

2

12.

3

11.

4

17.

518.

4

0

5

10

15

20

25

0605040302

330.

9

265.

7

200.

7

493.

3

645.

0

REVENUE (millions) DILUTED EPSNET INCOME (millions)

0

100

200

300

400

500

600

700

800

0605040302

52.

8

30.

2

20.

6

81.

7

111.

5

0

30

60

90

120

150

0605040302

0.

43

0.

32

0.

27

0.

59

0.

80

0.0

0.2

0.4

0.6

0.8

1.0

0605040302

EBITDA (millions) TOTAL ASSETS (millions)CFFO (millions)

756.

0

418.

9

336.

9

895.

3

1,

207

.3

0

250

500

750

1000

1250

1500

0605040302

124.

7

81.

4

43.

2

255.

9

334.

3

0

100

200

300

400

0605040302

119.

4

69.

6

12.

6

196.

5

0

100

200

300

400

0605040302

289.

3


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U.S. dollars (millions) 2006 2005 Annual change %

Wood Fibre Operations

Standing timber 352.6 240.8 46.4

Imported wood products 178.4 84.1 112.0

Wood chips & logs 90.0 155.9 (42.3 )

Manufacturing & Other Operations 24.0 12.5 92.8

Total Revenue 645.0 493.3 30.7

OPERATIONSATAGLANCE

Revenue Contributor

54.7%

MANUFACTURING&OTHEROPERATIONS

weproduceparticleboard,engineeredwoodfooring,orientedstrandboard,andoperatenurseriesand

greenerybusiness

WOODCHIPS&LOGS

wesourcewoodlogsromPRCsuppliersandsellthemaswoodchipsthroughanintermediary

aterprocessing

weimportlogs,veneer,sawntimberandotherwood-basedproducts,andsellthemtodomestic

customers

STANDINGTIMBER

weacquire,cultivateandsellstandingtimberatbothpurchasedandplantedplantations

Wood Fibre Operations Manufacturing &Other Operations

IMPORTEDWOODPRODUCTS

27.6% 3.7%14.0%


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Executive office

Operation office

China office

Manufacturing facility

Mandra forestry plantationsmanaged by Sino-Forest

Long-term wood fibre & secondaryforest generation

< 5,000

5,000 - 20,000

20,001 - 60,000

60,001 - 100,000

100,001 - 140,000

HEILONGJIANG

JILIN

LIAONING

INNER MONGOLIA

BEIJING

HEBEI

SHANXI

NINGXIA

SHAANXI HENAN

SHANDONG

HUBEI

HUNAN

GUIZHOU

ZHEJIANG

HAINAN

TAIWAN

JIANGSU

ANHUI

SUZHOU

JIANGXI

FUJIAN

GUANGXI HONG KONG

GAOYAO

GUANGDONG

YUNNANHEYUAN

0

20000

40000

60000

80000

100000

120000

191817161514131211109876543210

Purchased

Area (hectares)

Year

Source: Pyry

88,000 hectares

9.5 million m375,000 hectares

6.1 million m3

153,000 hectares

11.8 million m3

36,000 hectares

Planted(Wholly foreign-ownedenterprise)

Planted(Co-operativejoint venture)

DISTRIBUTION BY PLANTATION TYPE & AGE

Notes: 1.Basedon352,000hectaresotreesundermanagementasoDec31,2006

2.36,000hectarestreesagelessthanouryearshaveminimalbreoutput

3.Includeseucalyptus,pine,poplarandotherspecies

China


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Building

AwarenessSino-Forestsmissionistogenerateandsustain

awarenessthatenvironmentallyriendlypoliciesare

notonlyviablebutalsoeconomicallyrewarding.

Bybeingattheorerontosuchstrategies,Sino-Forest

positionsitselorinclusionintoanyenvironmentalinitiativesthatevolve.


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TAKING A LONG-TERM APPROACHWewereanearlyoreign-ownedentrantintoChinasorestrysector.Since

then,ourlong-termperspective,sustainablebusinessstrategyandinnovative

businesspracticeshavermlyplacedSino-Forestasoneotheleading

commercialwoodbresuppliersinthecountry.

Whilewecanbeproudoourstrongtrackrecord,weareaorward-looking

companywithambitiousyetrealisticgoals.Wewillcontinuetooperateatthe

orerontoourindustryandmakeinvestmentsthatincreasethevalueoourbusiness.

Weremaincommittedtodevelopingasustainablewoodbresupplywhile

diversiyingoursourcesoincomeaswegrow.Webelieveinsatisyingthe

needsotodaywithoutcompromisingtheenvironmentalresourcesneeded

byuturegenerations.Ourgoalistoownacriticalmassoast-growing,

high-yieldplantationtreesthatwillallowustodevelopaperpetualharvesting

model.Weintendtoremainleadersinthesustainabledevelopmento

commercialplantationsandeventuallyhaveacriticalmassotreesinour

inventoryromwhichwecanharvestannually.

Atyear-end2006,wehadaccumulatedover352,000hectaresoorestryplantationareaundermanagement,up9%rom2005.Duringtheyear,

weinvestedapproximately$383milliontoacquire129,276hectaresotrees,

andwesold111,367hectaresostandingtimber,generated$353millionin

revenue,whichrepresented55%ototalrevenue.

GROWING RAPIDLY WITH CHINAThereismassivegrowthpotentialorouroperationsinChinaandmany

opportunitieslieahead.

Thecountryhasexperiencedanaverageeconomicgrowthrateo10%

overthepastveyears.Withitsast-growingregionaleconomies,extensiveinrastructuredevelopment,mountingdirectoreigninvestment,increasing

urbanization,growingmiddleclassandrisinghomeownership,thePRCis

theastest-growingtimbermarketplaceintheworldandthethird-largest

consumerotimberproducts.However,Chinaacesasubstantialand

growingwoodbredecit.

AsChinaseconomycontinuestoheatupincoastalareasandeconomic

developmentgraduallymovesinland,weareadjustingourexpansionplans

accordingly.Lastyear,wesawhighercoastallandpricesraisethecosto

acquiringtreesthere.Withasizeableplantationoperationalreadyestablished

onthecoast,weturnedourattentioninlandtondattractivelypricedbre.

CHAIRMANSMESSAGE

AllenChan,ChairmanandCEO

Sino-Forestcelebratedseveralsignicantmilestonesin2006.Inourtwelthsuccessulyearinoperation,weachievedrevenueo$640millionandour

marketcapitalizationexceeded$1billion.

Evenmoreimpressivearesomeoourcompoundannualgrowthrates

overthosersttwelveyears:revenue33%,netincome35%anddiluted

earningspershare21%.

Sino-Foresthasachievedaormidablemarketpositioninarelatively

shorttime.We are growing in size, strength and stature.

Sino-Forestsorestprotectioncrewconductroutinepatrol


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Inlinewithourstrategy,wesignedanumberosignicantlong-termbre

supplyagreements.Thisenablesustoacquireatotalo600,000hectareso

pineandrplantationtreesinHunanandYunnanProvince,andtosecure1.5

millioncubicmetres(m3)owoodbreintheInnerMongoliaAutonomous

Regionthroughmanagingaregenerationprogramosecondaryorests.

MOVING AHEAD STRATEGICALLYThecommercialorestryplantationindustryinthePRCisrelatively

underdevelopedwithonlyalimitednumberolarge-scaleplantations

currentlyusingmodernsilviculturemanagementpractices.Oursuccessul

twelve-yeartrackrecorddemonstratesthatwehavedevelopedkey

competitiveadvantagesinthatarea.

Tokeepupwithincreasedmarketdemandandretainourleadershipposition

asapreerredwoodbresupplier,wewillcontinuetoexecuteourproven

strategy.Inadditiontoincreasingourplantationholdings,weexpectto

developthemtotheirullpotentialbydeployingourstrongresearchand

developmentcapabilitiesandproessionalorestrypractices,andthrough

ourcommitmenttooperatinginanenvironmentallysustainablemanner.

Wearealsocommittedtoutilisingadvancetechnologyandprocessingto

maximisethevalueoourwoodresources.Thiswillenableustominimise

waste,createmoreemploymentandcontributetomodernisingChinas

burgeoningorestryindustry.

OurstrategicinitiativesarealignedwithChinaseleventhFive-yearPlan,

wherebythecentralgovernmentaimstoreducepovertyinruralareas

andimprovecommunitylivelihoodsbyacceleratingregionaleconomic

developmentininnerandnorthernregionsothecountry.

Wewilldevelopourwoodbreoperationsinstrategiclocations,seeking

tosecureplantationlandwithlong-termleases,bothinlandandin

south-westernandnorthernprovinces.Thiswillgiveusacriticalmassotrees,

geographicallydiversiyourplantationholdingsinareaswherewoodbrecan

beobtainedatattractiveeconomicreturns,andhelpdevelopregionalmarkets

thatcouldproduceconsistentqualityorest-relatedproducts.

Ourvisionistobecometheleading,commercialorestryplantation

operatorandpreerredsupplierowoodbretodownstreamconsumersin

thewoodpanel,urniture,construction,interiordecorationandpulpand

paperindustriesinthePRC.

CHAIRMANSMESSAGE

DenselypopulatedChineserinHunan


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Toachieveourvision,westrivetobeattheorerontoourindustryby

creatingregionalwoodbasketsthatensureasustainableandquality

supplyowoodbretodownstreammanuacturingoperations.Wealsoplan

tointroducenewtechnologiestoimproveproductivity,qualityandeconomic

viabilityoChinasengineeredwoodproducts.Inadditiontoincreasingthe

valueoharvestedbre,wewillalsocontinuetocreateemployment,thus

improvinglivelihoodsinruralareas.

Sino-Foresthastrulygrowninstature.Ournancialsuccessandgrowthhavecaughttheattentionomanyinstitutionalandindividualinvestors

aroundtheworldwhohaveseenourinventoryotreesandearnings

pershareincreasedramatically.

TheseinstitutionalinvestorsincludeTemasekHoldings,whichagreedto

takeupastrategicstakeoapproximately25millioncommonsharesat

Cdn.$9.15pershare,representingapproximately16%othetotaldiluted

sharesoutstanding.Whencompleted(expectedinearlyApril),thestrategic

placementwillraiseUS$200millionogrossproceedswhichwillbeused

ortheacquisitiono200,000hectaresstandingtimberinYunnanProvince

andbeyond,andorthedevelopmentodownstreamacilitiestomaximise

thevalueothewoodbretobeharvested.Thisisallexcitingnewsor

Sino-Forestanditsshareholdersaswebelievewehavethestrategicplan,

managementcapabilitiesandnancialresourcestoachieveournext

billion-dollarmilestone,intotalrevenuethisdecade.

Inclosing,wewouldliketoextendourgratitudetoallouremployees,

businesspartnersandstakeholderswhocontributedtothecorporations

successin2006,andwelookorwardtocontinuingtobuildsustainable

valuewithyouin2007.

Iyouareplanningorayear,sow rice;

Iyouareplanningoradecade,

plant trees;

Iyouareplanningoralietime,

educate people.

Allen Chan

Chairman and CEO

March 31, 2007


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MARKETFACTORS

Withapopulationo1.3billionpeople,thePRCisanenormousmarket.Theeconomy

hasbeengrowingby10%peryearsince2001.Economicreorms,oreigninvestment,

capitalspendingoninrastructure,urbanisation,andaast-emergingmiddleclassareall

contributingtothestellargrowthindemandorwoodbre.China,however,hasalargewoodbredecitandmustimportwoodromabroad.

Keydriversacceleratingdemandorourproductsincludeconstruction,investmentin

inrastructure,manuacturingournitureandothernishedwood-basedproducts,

interiordecorationandthepulpandpaperindustries.

CHINA PULP CONSUMPTION: 1995-2005

Withcitiesexperiencinganinfuxopeopleromtheruralareas,buildingocommercial

andresidentialspacepersistsunabated.Escalatingurbanisationhasseenthemiddleclass

growtoatleast100million,creatingvoraciousmarketsorhouseholdurniture,fooring

andwoodxtures.

In1998,Chinaprohibitedloggingonaturalorests,whichhadcausedseveresoilerosion

andfooding.ElsewhereinAsia,restrictionsonloggingonaturalorestshaveexacerbated

shortagesoharvestedwood.Tocompensateoritsshortall,inadditiontoimportingtimber

romneighboringcountries,Chinahasbeenencouragingcommercialorestryplantation

programsandhasincreasednaturalorestcoverage.In2006,thecentralgovernment

launcheditseleventhFive-yearPlan,placingorestrydevelopmentrmlyontheagenda.

ThePlanencouragesexpansionosustainableplantationsalongwithagreaterocuson

regionaleconomicdevelopmentandenhancedjobcreation.

20052004200320022001200019991998199719961995


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WOOD IMPORTS INTO CHINA: 1995-2005

WOOD BASED PANEL PRODUCTION AND NET IMPORTS IN CHINA: 1995-2005

GivenChinascontinuegrowthinpanelboardandpulpproductions,Sino-Forest,asaleadingoreign-owned,

commercialorestryplantationoperatorinthePRC,isstrategicallypositionedtomakeasignicantcontribution

tosupplytheincreasingdemandandrealisingvalueinthisexcitingmarket.

20052004200320022001200019991998199719961995

20052004200320022001200019991998199719961995-6

-5

-4

-3

-2

-1

0

1

2

3

20052004200320022001200019991998199719961995


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Cultivating

QualitySino-Forestcareullyconsidersthethinkingogovernments

andlocalcommunitieswhendevelopingitsstrategyorgrowth.

Byengagingandworkingalongsidethesepartners,

Sino-Forestisabletomakeimportantcontributionstoprimary,

secondaryandtertiarylevelsoeco-businessdevelopments.


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STRATEGYANDBUSINESSOPERATIONS

Oursuccessultwelve-yeartrackrecordrepresentsasignicantcompetitiveadvantage

inthePRC,wherethecommercialorestryplantationindustryisrelativelyunderdeveloped

andwhereewlarge-scaleplantationsuseproessionalorestrymanagementpractices.

Wehavesuccessullyexecutedourbusinessstrategyoacquiringandcultivating

ast-growingtreesatbothpurchasedandplantedplantations.

Furtherenhancingourcompetitiveness,wehaveorgedvaluablerelationshipswith

orestrybureaus,plantationarmers,serviceprovidersandwoodtraders.

Wemaximiseplantationoutputbyapplyingadvancedplantationmanagementand

silviculturepracticesocusedonthedevelopmentosustainablecommercialplantations.

Wewillcontinuetoimproveyieldsatourplantationsthroughinvestinginresearchand

development.

Moreover,Sino-Forestisstrategicallyengagedinintegrateddownstreamoperationsand

orest-relatedbusinesses,includingproducttrading,manuacturingandnurseries.Theseoperationsprovidemeaningulsynergiesthatenableustoreapadditionalvaluerom

Chinasvastmarketpotential.

OUR STRATEGIC BUSINESS SEGMENTSSino-Forestsoperationsarecomprisedotwocorebusinesssegments.OurWood

FibreOperationssegmentisthemajorrevenuecontributor(96%in2006)whileour

Manuacturing&OtherOperationssegment(4%in2006)enablesustocreateextra

valueromdownstreamsynergies.


Atourannualshareholdersmeetingheldlastyear,weannouncedthatourstrategicgoalorthenextthreetoveyearsistoincreaseourwoodbreoutputto15-20millionm3rom

8millionm3annually,andourlong-termgoalistocreatewoodbasketsinseveral

regionalmarkets,allowingustohaveasignicantandsustainablesupplyowoodbre

inourportolio.Thisgoalischallengingbutrealisticgivenourproventrackrecordo

accumulatingplantationland,combinedwithourothercompetitivestrengths.

In2006,ourwoodbreoutputreached10millionm3excludingbreromtheHunan

treesacquisitionandromlogstobeharvestedselectivelyinInnerMongolia.Meanwhile,

ourmerchantablestandingvolume(i.e.immediatelyharvestablebre)perPyrys

valuationreportincreased15%to27.4millionm3rom23.8millionm3in2005.

Thisisattributabletotheadditionoplantationtreesundermanagementandimprovementoaverageyieldrom78perm3perhectareto87perm3perhectare.

Wewillremainattheorerontotheindustry,movingintoinnerandnorthernPRC

provincestolockinstrategiclocationsandseizeopportunitiesordiversicationand

growth.

(Fromlettoright)ZhaoWeimao,ChenHua,DaveHorsley,AllenChan,AlbertIp,KKPoon


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Standing TimberAtyear-end2006,Sino-Foresthad352,000hectaresoplantationsunder

management,comprisedobothmatureandprematuretreesmainly

ast-growingeucalyptus,poplar,pineandrineitherplantedor

purchasedplantations.Ourplantationsarelocatedprimarilyinsouthernand

easternChinainthewealthierprovincesoGuangdong,Guangxi,Jiangxi,Fujian

andHunan.

OneoSino-Forestsbusinessobjectivesistobecreativeinsourcingand

accessingtimberresources,andtoexpandourplantationsgeographically.

Inthesecondquartero2006,weenteredtheInnerMongoliaAutonomous

Regionthroughanagreementtosecurelong-termsupplyobirchandlarch

woodbreoverthenexttwelveyearsbyassistinginaregenerationprogramme

osecondaryorests.

Inaddition,Sino-Forestsignedtwosizeablestandingtimberacquisition

agreements,oneinHunanandtheotherinYunnan,thatwillrunoveraperiod

oourteenyearsandtenyearsrespectively.Ouroverallgoalistodeployour

silviculturebestpracticestooptimizetheusageandvalueowoodbrethrough

averticallyintegratedoperation.Wewillstartbysellinglogsharvestedrom

standingtimber,obtainingcompetitivepricesorvariouslogsizesandresidual

timber.However,weseegreaterpotentialwithsubsequentphasesoperpetual

growth.Operatingunderthepurchasedplantationmodel,wewillacquiretrees

andtherightstosellthem,alongwiththerstrightstoleasethelandor

re-plantingorperiodsothirtytotyyears.Theseacquisitionswillbemade

throughprivately-ownedorcollectively-ownedentitieswiththeendorsement

othelocalorestrybureauswherenon-state-ownedstandingtimberwillbe

acquired.

Anotherinitiativeinprogressistheconversionoourplantedplantation

co-operativejointventures(CJVs)towhollyoreign-ownedenterprises

(WFOEs).Ouraimistoobtaingreatercontroloverplantationmanagement

throughplantationlandleasingratherthanharvestprotsharing.Tobringour

marginsatplantedplantationsonparorabovethoseatpurchasedplantations,

wewillre-plantwhereland-leasetermsareoptimal.

Wood Chips and Logs

In2006,thisbusinesssegmentproducedapproximately763,000bonedrymetric

tonnes(BDMT)equivalentto1.7millionm3owoodbreoutput,andsales

amountedto$90million,downrom$156millionlastyear.Logsaresourced

locallythroughourPRCpartnersandarethenprocessedbyourbusinesspartner

anauthorizedintermediarywithalicencetoselllogsaterprocessing.

Weexpectthissegmentwillcontinuetodeclineduring2007asthewood

chippingcapacitymaynotbeavailabletousduetostrongcompetition.

However,Sino-ForestwillretaintheannualwoodbrevolumequotasourcedromPRCpartners,andourplanistoshitthoselogstoourmanuacturing

acilitiestomaximiseprotabilityoourdownstreamoperations.

Imported Wood-based Products

WeexpectthatChinassubstantialwooddecitwillcontinuetoincreasedue

torisingdomesticdemand.Tomeetdemandorlarge-diameterlogsand

wood-basedproductssuchasveneer,andtosupplementsawntimberromour

plantationsportolio,weimportwood-basedproductsromglobalsuppliersin

variouscountries,includingNewZealand,PapuaNewGuineaandRussia.

Recently,theRussiangovernmentannouncedplanstoincreaseexporttaxonlogs

STRATEGYANDBUSINESSOPERATIONS

Top:NurseryinGaoyaopreparingornextre-plantingseason

Bottom:NeedlepineleavesromtheChineseramily(Cunninghamiaaceolata)


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inthreephasesromthecurrentlevelo6.5%to80%by2009,eectiveromJuly2007onwards.Accordinglyweplantoexpandourglobalsourcingnetwork

tosatisycustomersgrowingdemandorqualityproductsatcompetitiveprices.

Manufacturing & Other Operations

Ourmanuacturingandotherwood-basedoperationscomplementourwood

breoperationsthroughsynergiesthatmaximiseusageandaddvaluetoour

woodbre.

Particleboard Manufacturing Gaoyao, Guangdong Province

Ourparticleboardoperationsarelocatedonaseventeen-hectaresitewithin

theEconomicDevelopmentZoneinGaoyaoCity,GuangdongProvince.Themanuacturingplantproduceshigh-qualityparticleboardandamelamine-aced

chipboard,targetingdistributorsandlargeend-userslocatedinGuangdong.

Weexpecttocompleteupgradingourmanuacturingacilityinthesecondhalo

2007.Oncompletion,ourparticleboardcapacitywillincreaserom100,000m 3to

275,000m3andmelaminecapacitywillgrowrom2millionm2to6.4millionm2.

Engineered Wood Flooring Suzhou, Jiangsu Province

Weestablishedourfooringbusinessin2004withtheobjectiveoprovingthe

easibilityousingsmall-diameterlogstomanuacturequalityproducts

traditionallymaderomlarge-diameterlogs.Usingeucalyptustreescombinedwithothertreespecies,weproduceoverteenfooringpatterns.

Ourengineeredfooringisavailableatover200Sino-Maplebrandedretailstores

andlargedo-it-yourselshopsnationwide.Sino-Mapleisamongthetopve

engineered-woodfooringbrandsinChina.

Wecompletedtherstphaseoconstructionoourmanuacturingacilities

inthethirdquarter2006,andSino-Forestisnowwellpositionedtocapturethe

potentiallyhugedomesticdemandorfooringproducts.Thesecondphaseis

scheduledtobebuiltin2007,subjecttoproductionutilisationandprotability

otherstphase.Oncompletionothesecondphase,thecombinedcapacitywill

beapproximately8millionm2

.

Oriented Strand Board, Muling City, Heilongjiang Province

Orientedstrandboard(OSB)isstillarelativelynewproductinthePRC,

althoughitiswidelyusedinothercountriesasstructuralpanelorhouses,

fooringandpackagingmaterial.

LocatedinMulingCity,Heilongjiang,closetotheRussianborder,ournewOSB

planthasanannualcapacityoapproximately12,000m3.Thelocationenables

theacilitytoobtainanabundantandcost-eectivesupplyowoodbre,both

domesticallyandinternationallyromRussia.

Nurseries and greenery, Suzhou, Jiangsu Province

Ournurseriesandlandscapingbusinessarecreatingabetterlivingenvironment

orChinesecitizensbyprovidinggreeneryandimprovingairquality.Identiying

theneedortreenurseryproductsandurbanlandscapemanagement,

Sino-Forestispursuingopportunitiesinthisorest-productbusinesssegment.

Utilisingourplantationresourcesandexpertise,weestablishedSinowinPlantings

(Suzhou)Co.Ltd.,whichsources,suppliesandmanageslandscapingproductsor

propertydevelopersandotherorganisations.

Top:Finger-jointboardoperationinHunanProvinceacquiredinQ12007

Bottom:LogsoChineserharvested,averagediametre18cm


18/67


BranchingOutSino-Forestsbusinessdynamicenablesit

toparticipateinrelatedlucrative

eldsooperation.Down-streambusinessmodels

includeprocessingandmanuacturing.


19/67


CORPORATEGOVERNANCE

Sino-ForestsBoardoDirectorscontinuestoimplementabest-practiceapproachto

corporategovernanceasrecommendedbyCanadiansecuritiesregulatorsandbythe

TorontoStockExchange(TSX).Overthepastewyears,wehaveestablishedmandates

orourDirectors,Chairman&CEO,andthethreeCommitteeschairedbytheBoardsindependentDirectors.Sino-Forestadoptscommonlyacceptedgovernancepoliciesand

abidesbypublicdisclosurerequirements.

AsacompanystronglyrootedinChinaandlistedontheTSX,Sino-Forestoers

investorsaChinaplaythatincorporatesthetransparencyandsophisticationo

internationalcorporateandaccountingstandards.

MostoourDirectorsarehighlyexperiencedandareindependentasdenedinCanadian

securitieslegislation.

Sino-Forestcontinuestoimproveitscorporategovernance,publicdisclosureand

communicationswithitscurrentandpotentialinvestorsinanecientandopenmanner.

Furthermore,weparticipatedinanumberoindustryandinstitution-hostedconerences

andconductedtoursoouroperationsortheequityandcreditanalysts.

Meanwhile,ourBoardcontinuestoreviewandne-tunecorporategovernancepolicies

andtools,includingourCodeoBusinessConduct,PublicDisclosurePolicy,Insider

TradingPolicy,WhistleBlowerPolicy,andBoardEectivenessSurvey.

TheBoardhasthreeCommitteesandeachhasadenedmandatesetoutinitsCharter,

chairedandcomposedentirelyoindependentDirectors:

TheAudit Committeemonitorsthecorporationssystemointernalnancialcontrols,

evaluatesandreportsontheintegrityonancialstatementsandoverseestheaccounting

andnancialreportingprocessesandauditsonancialstatementsothecorporation.Jamie Hyde, CA (chair), Edmund Mak, W. Judson Martin

Corporate Governance Committeedevelopsandmonitorsthecorporationsapproach

tomattersogovernance.ThisCommitteeisalsoresponsibleorthereviewand

recommendationtotheBoardoreportsoncompliancewiththegovernanceguidelines

andrequirementsotheTSX.

W. Judson Martin (Chair), Edmund Mak, Jamie Hyde, CA

Compensation and Nominating Committeedevelopsandmonitorsthecorporations

approachtothecompensationoitsOcersandtothenominationoDirectorsto

theBoard.

W. Judson Martin (Chair), Jamie Hyde, Simon Murray

TheCorporationsreportonCorporateGovernanceissetoutinSino-Forests

ManagementInormationCircularoritsmostrecentannualshareholdersmeetingwhich

canbeoundonwww.sedar.com.


20/67


Nurturing

SustainabilitySino-Forestsbusinessmodelisbothprotable

andsustainable.Atitsrootistheinherentwishto

preservetheenvironmentuponwhichour

verylivesdepend.Onthegroundisasolutionthat

enablesustodothisinananciallyrewardingwaythatisalso

environmentallyriendly.Consumptionwithout

depletionisindeedpossible.


21/67

SINO-FOREST CORPORATION 19

Managements Discussion and Anasis (MD&A) reates to the financia condition and resuts of Sino-Forests operations.Throughout this MD&A, uness otherwise specified, Sino-Forest, Compan, we, us and our refer to Sino-Forest

Corporation and its subsidiaries. Except where otherwise indicated, a financia information refected herein is determined

on the basis of Canadian genera accepted accounting principes (GAAP). This MD&A shoud be read in conjunction

with Sino-Forests audited consoidated financia statements and notes thereto. The United States doar is our reporting

currenc and a figures contained herein are in United States doars uness otherwise indicated.

Additiona information reating to our compan, incuding our annua information form for the ear ended December 31,

2006 and other statutor reports are avaiabe on SEDAR at www.sedar.com.

FORWARD-LOOKING STATEMENTSThis MD&A contains forward-ooking statements which refect managements expectations regarding Sino-Forests future

growth, resuts of operations, performance, business prospects and opportunities. Words such as expects, anticipates,

intends, pans, beieves, estimates, or simiar expressions, are forward-ooking statements within the meaning of

securities aws. Forward-ooking statements incude without imitations, the information concerning possibe or assumed

future resuts of operations of Sino-Forest. These statements are not historica facts but instead represent on Sino-Forests

expectations, estimates and projections regarding future events. These statements are not guarantees of future performance

and invove assumptions and risks and uncertainties that are difficut to predict. Therefore, actua resuts ma differ materia

from what is expressed, impied or forecasted in such forward-ooking statements. In addition to the factors Sino-Forest

current beieves to be materia such as, but not imited to, our abiit to acquire rights to additiona standing timber, our

abiit to meet our expected pantation ieds, the ccica nature of the forest products industr and price fuctuation in and

the demand and supp of ogs, our reiance on joint venture partners, authorized intermediaries, ke customers, suppiers

and third part service providers, our abiit to operate our production faciities on a profitabe basis, changes in currencexchange rates and interest rates, evauation of our provision for income and reated taxes and PRC economic, poitica

and socia conditions and government poic, other factors not current viewed as materia coud cause actua resuts to

differ materia from those described in the forward-ooking statements. Athough Sino-Forest has attempted to identif

important risks and factors that coud cause actua actions, events or resuts to differ materia from those described in

forward-ooking statements, there ma be other factors and risks that cause actions, events or resuts not to be anticipated,

estimated or intended. According, readers shoud not pace an undue reiance on forward-ooking statements. The

Compan does not undertake an obigation to update or reease an revisions to these forward-ooking statements

to refect events or circumstances after the date of this report.

OVERVIEW OF BUSINESS

About Sino-ForestWe are a eading, foreign owned, commercia forestr pantation operator in the PRC. As at December 31, 2006, we had

approximate 352,000 hectares of forestr pantations ocated main in southern and eastern China.

We began operations in 1994 as the first, foreign and private managed compan invoved in forest products in China.

Our principa businesses incude the ownership and management of forestr pantation trees, sae of standing timber,

wood chips and ogs, and compementar manufacturing of downstream engineered wood products.

Strategic Business UnitsSino-Forests operation is comprised of two core business segments Wood Fibre Operations is the major revenue

contributor, whie our Manufacturing & Other Operations enabe us to reaise added vaue from downstreamoperation.

Revenue from Wood Fibre Operations are derived from three main sources as foows:

Standing Timber

we acquire, cutivate and se standing timber from our purchased and panted trees pantations;

Wood Chips and Logs

we source ogs from PRC suppiers and process and se them as wood chips through an authorized intermediar

and earn commission income from agenc services in the saes of wood chips;

MANAGEMENTS DISCUSSION AND ANAlySIS


22/67

SINO-FOREST CORPORATION20

MANAGEMENTS DISCUSSION AND ANAlySIS (contd)

Imported Wood-based Productswe source ogs, veneer, sawn timber and other wood-based products goba and se them in the domestic PRC

market.

Our Manufacturing & Other Operations incude:

particeboard manufactured in Gaoao, Guangdong Province;

engineered Wood Fooring produced in Suzhou, Jiangsu Province, and sod over 200 stores nationwide in the PRC;

oriented Strand Board manufactured in Muing Cit, Heiongjiang Province;

finger Joint Board produced in Hongjiang Cit, Hunan Province;

greener & nurseries operation based in Suzhou, Jiangsu Province.

Our Vision and StrategOur vision is to become the eading, commercia forestr pantation operator and preferred suppier of wood fibre to

downstream consumers in the wood pane, furniture, construction, interior decoration and pup and paper industries in the

PRC.

To achieve our vision, we strive to be at forefront of our industr b creating regiona wood baskets that ensure a

sustainabe and quait supp of wood fibre to downstream manufacturing operations. We aso pan to introduce new

technoogies to improve productivit, quait and economic viabiit of Chinas engineered wood products.

We focus on the strategies that have made Sino-Forest successfu:

acquire additiona forestr pantations and access to ong-term supp of wood fibre in the PRC where regiona markets

with growing demand wi be ocated;

improve the ieds of our forestr pantations b continued investment in research and deveopment;

practice environmenta responsibe forestr;

strengthen our management processes and information sstems to support the growth of our muti-faceted businesses;

strengthen our engineered wood manufacturing business to compement our pantation operations with an aim to

increase vaue of our wood fibre;

widen and diversif our investor base, and enhance our corporate image and profie.

Other Ke Factors Affecting Our BusinessOur resuts of operations are, and wi continue to be, affected b the ccica nature of the forest products industr.

Prices and demand for ogs and wood chips have been, and in the future are expected to be, subject to ccica fuctuations.

The pricing in the forestr market is affected b the prices of the utimate wood products produced from ogs in the PRC,

incuding furniture, construction materias, interior decoration materias and pup and paper products. The prices of wood

products are aso affected b the avaiabiit of wood substitutes. The market for wood products are sensitive to changes in

industr capacit and output eves, genera timber industr conditions and ccica changes in the word and PRC economies,

an of which can have a significant impact on seing prices of wood products. The demand for wood products is aso

substantia affected b the eve of new construction activit, which is subject to fuctuations that ma or ma notcorrespond to overa economic trends. Decreases in the eve of construction activit genera reduce demand for wood

products. The demand for wood products is aso affected b the eve of interior design activit and the demand for wood

chips in the pup and paper markets. These activities are, in turn, subject to fuctuations due to, among other factors:


23/67


changes in domestic and internationa economic conditions;

interest rates;

government reguations and poicies;

popuation growth and changing demographics; and

seasona weather cces (e.g. dr summers, wet winters) and other factors.

Ccica changes in the forest products industr, incuding changes in demand and pricing for our products and the other

factors described above, coud have a materia adverse effect on our business, financia condition and resuts of operations.

Our decisions and abiities to deveop and operate future forestr pantations are subject to various factors and uncertainties.

Shoud we be unabe to exercise our rights to obtain additiona forestr pantations, our business, financia condition and

resuts of operations coud be materia and adverse affected.

The success of our business depends upon the productivit of our forestr pantations and our abiit to reaise our expected

ieds. Forestr pantation ieds depend on a number of factors, man of which are beond our contro. These incude

damage b disease and pests and other natura disasters, and weather, cimate and soi conditions. Our abiit to maintain

and improve our ieds wi depend on these factors and the resuts of our research and deveopment efforts.

We re on our reationships with joint venture partners, authorized intermediaries, ke customers, suppiers and third part

service providers for our forestr pantations and trading activities. We re on our joint venture partners to, among other

things, fufi their obigations under the agreements. We re on authorized intermediaries for our wood chips and trading

activities. We re on a few arge customers for a significant percentage of our tota revenue. We re on a few arge

suppiers for a significant percentage of our timber supp. We re to a significant extent on third part service providers

for da-to-da operations of our pantations.

We are heavi dependent upon our senior management in reation to their expertise in the forest industr, research and

deveopment in forest pantation management practice, wood-based products manufacturing production processes and

reationships cutivated b them with our PRC CJV partners, major customers and others.

We are subject to reguation under a variet of PRC nationa and oca aws and reguations. Vioations of a variet of PRC

aws and reguations, incuding PRC environmenta poicies and programs that app to our forestr pantations, coud resut

in civi and crimina penaties, incuding the revocation of icenses required for our business.

The forestr industr is susceptibe to weather conditions, timber growth cces and natura disasters outside of our contro.

The occurrence of these or other natura disasters ma disrupt or reduce the supp of trees avaiabe for harvesting in the

areas of the PRC where our forestr pantations are ocated.

Our manufacturing pants are in an ear stage of deveopment and have a short operating histor. Our manufacturing

pants ma not be profitabe or successfu and are subject to the risks inherent in estabishing a new business, incuding

competitive pressures, which coud have a materia adverse effect on our business, financia condition and resuts

of operations.

We report our financia statements in United States doars, whie substantia a of our revenue is denominated in

Renminbi. An significant fuctuation in the exchange rates between the Renminbi and other currencies, such as the

United States doar, Canadian doar, and Hong Kong doar, or in the United States doar against the Renminbi, the

Canadian doar or the Hong Kong doar, ma have an adverse impact on our resuts of operations and ma adverse

affect the vaue, transated or converted into United States doar, Canadian doar or otherwise, of our revenue and

net income.

Significant Accounting Policies and Interpretation

Cost of Sales

Our costs of saes consists of: (1) depetion of timber hodings as the are sod; (2) the costs of ogs used as the raw

materias in our saes of wood chips; (3) processing fees and administrative charges associated with wood chip saes;

(4) the costs of imported ogs and wood-based products acquired in our saes and trading activities of these products;

and (5) the costs incurred at our manufacturing pants.


24/67



Depletion of Timber HoldingsTimber hodings incude acquisition costs for oung trees and standing timber, panting and maintenance costs, which are

capitaised at cost in our financia statements unti the trees are sod. Panting and maintenance costs incude the foowing:

panning, operations design, site preparation, terracing, fertiisation, panting, thinning, tending, protection, research and

deveopment, forestr bureau service charge, overhead and ease costs. Timber hodings from standing timber saes are

depeted when the significant risks and rewards of ownership have been transferred to the buer, which occurs when the

contract for sae is entered into.

EBITDA

Defined as income from operations for the period after adding back depreciation and amortisation, impairment of

capita assets as we as depetion of timber hodings from cost of saes, for the period. EBITDA is presented as additiona

information because we beieve that it is a usefu measure for certain investors to determine our operating cash fowand historica abiit to meet debt service and capita expenditure requirements. EBITDA is not a measure of financia

performance under Canadian GAAP and shoud not be considered as an aternative to cash fows from operating

activities, a measure of iquidit or an aternative to net income as indicators of our operating performance or an

other measures of performance derived in accordance with Canadian GAAP.

SIGNIFICANT BUSINESS ACTIVITIESSignificant activities that have occurred during the ear ended December 31, 2006 and to the date of this report were

as foows:

Appointment of Director

In Februar 2006, the Compan announced the appointment of Mr. Judson Martin to its Board of Directors to repace

Mr. David Horse who resigned as a resut of becoming the Compans Senior Vice President and Chief Financia Officer.

Sndicated Loan FacilitIn Februar 2006, the Compan announced the signing of a $150 miion five-ear and one da loan Faciit, bearing

interest at lIBOR pus between 0.80% and 1.50% depending on consoidated debt to EBITDA. The faciit wi be primari

used for the acquisition of additiona standing timber and ogs and for genera corporate purpose. The faciit has been

fu drawn down.

Long-Term Wood Fibre SupplIn Ju 2006, the Compan entered into a master agreement with Inner Mongoia Forest and Timber Resources Compan

limited and Erianhot lianhe Forestr Bureau to secure a ong-term supp of wood fibre whie managing a regeneration

programme of secondar forests. Under the master agreement, the Compan wi acquire at east 1.5 miion cubic meters

of wood fibre annua for tweve ears at a price which is RMB80 (or $10 equivaent) ess than the owest price at the

timber trading market.

Opening of Flooring Facilit in SuzhouIn September 2006, the Compan announced the opening of its engineered wood fooring manufacturing faciit in

Suzhou. To be buit in two phases, phase one of the project has been competed and is in commercia operation with

an annua capacit of 4 miion m2. Construction of the second phase is expected to commence in 2007 which woud

increase the production capacit to 8 miion m2 when competed.

Acquisition of 400,000 hectares of Plantation Trees in HunanIn September and December 2006, the Compan entered into master agreements with Hongjiang Cit Forestr Technoog

Integrated Deveopment Services Compan to acquire approximate 400,000 hectares of pantation trees in Hongjiang

Cit, Hunan Province for a tota of approximate $1,291.3 miion to $1,549.5 miion over a fourteen-ear period. The

agreements aso provide the Compan the right of first refusa to ease the and for fift ears after harvesting.


25/67


Update Valuation of Forest Plantation Assets in ChinaIn March 2007, the Compan announced that it has received the updated, independent vauation of its commercia

pantation assets as we as a prospective vauation of its proposed pantation deveopment pans in China. Using a

discounted cash fow methodoog, Pr estimates that the existing forest pantation (singe rotation on) as at December

31, 2006 had a vaue of approximate $919.0 miion and on a perpetua rotation basis, a vaue of approximate $1,427.6

miion.

SELECTED ANNUAL FINANCIAL INFORMATIONThe foowing seected financia information has been derived from our consoidated financia statements for the three

ears ended December 31, 2006, 2005 and 2004.

Over the past three fisca ears, we have focused on growing our standing timber pantation operations. Revenue hasgrown over these periods primari due to increased saes of standing timber. Our revenue from standing timber increased

from $105.1 miion (sod 37,369 hectares, 31.8% of revenue) in 2004, to $240.8 miion (sod 108,013 hectares, 48.8%

of revenue) in 2005 to $352.6 miion (sod 111,367 hectares, 54.7% of revenue) in 2006.

During these periods, our gross profit increased according. Gross profit margin, being gross profit expressed as a

percentage of revenue, increased to 30.2% in 2006 as saes of standing timber generated a higher gross profit margin

than our other business segments. However, gross profit margin decined to 27.7% in 2005 compared to 30.7% in 2004

as saes of standing timber in 2005 incuded a higher proportion of ower margin saes of standing timber from the Heuan

Pine Undertaking.

Non-current assets, primari standing timber, increased over the past three ears as we continued to focus on deveoping

our pantation hectares under management. As at December 31 of each ear, we had the foowing pantation area undermanagement:

2004 242,000 hectares

2005 324,000 hectares

2006 352,000 hectares

In 2004, we issued ong-term debt in the amount of $300 miion to fund the acquisition of mature pine pantations

(Heuan Pine Undertaking), and to repa existing debts. In 2006, we had obtained a five-ear and one da $150 miion

sndicated oan for acquisition of additiona standing timber and ogs.

years ended December 31, 2006 2005 2004(in thousands, except earnings per share and common shares outstanding) $ $ $

OPERATING RESULTS

Revenue 644,979 493,301 330,945

Cost of saes (450,481) (356,430) (229,433)

Gross profit(1) 194,498 136,871 101,512

Net income from operations 152,615 112,607 73,389

Net income 111,456 81,687 52,774

EBITDA(2) 334,320 255,910 124,663

Basic earnings per share(3)(4) 0.81 0.59 0.43

Diuted earnings per share(3)(4) 0.80 0.59 0.43

FINANCIAL POSITION

Current assets 333,609 277,340 320,660

Non-current assets 873,646 617,931 435,389

Tota assets 1,207,255 895,271 756,049

Current iabiities (incuding current portion of ong-term debt) 151,596 127,262 83,795

long-term debts (net of current portion) 450,000 300,000 300,000

Tota sharehoders equit (net assets) 605,659 468,009 372,254

Cash dividends decared per share nil ni ni

Common shares outstanding 137,999,548 137,789,548 136,589,548


26/67



RESULTS OF OPERATIONS 2006 VS 2005

RevenueThe foowing tabe sets forth the breakdown of our tota revenue for the ears ended December 31, 2006 and 2005:

Our revenue increased 30.7% to $645.0 miion in 2006. The increase in revenue was due primari to the increase in saes

of standing timber and imported wood products, offset b a decrease in the saes of wood chips and ogs.

Wood Fibre Operations Revenue

Standing Timber

The foowing tabe sets forth revenue from standing timber saes for the ears ended December 31, 2006 and 2005:

Revenue from saes of standing timber increased 46.4% to $352.6 miion in 2006. In 2006, we sod 111,367 hectares of

standing timber, compared to 108,013 hectares the previous ear. The increase was main due to the saes of an additiona

35,117 hectares of purchased and panted pantations offset b a decrease of 31,763 hectares of standing timber saes

from the Heuan Pine Undertaking. The average seing price per hectare increased 42.0% from $2,230 in 2005 to $3,166

in 2006. The increase in the average seing price per hectare was primari attributed to the higher proportion of saes of

purchased pantations to tota saes and saes of purchased pantations which had a higher ied and therefore higher

seing price per hectare.

Standing timber saes comprised 54.7% of tota revenue in 2006, compared to 48.8% in 2005.

Wood Chips and Logs

The foowing tabe sets forth revenue from wood chips and ogs for the ears ended December 31, 2006 and 2005.

2006 2005

$000 % $000 %


Standing timber 352,574 54.7 240,829 48.8

Imported wood products 178,379 27.6 84,136 17.1

Wood chips and ogs 89,994 14.0 155,870 31.6

Manufacturing and Other Operations 24,032 3.7 12,466 2.5Total Revenue 644,979 100.0 493,301 100.0

2006 2005

BDMTAverage

selling price Revenue BDMTAverage

seing price Revenue$ $000 $ $000

Wood chips 763,440 109.9 83,894 1,348,840 105.5 142,301

Wood ogs 495 3,829

Commission 368,640 15.2 5,605 657,830 14.8 9,740

Total 89,994 155,870

2006 2005

HectaresSales per

hectareTotal

revenue HectaresSaes per

hectareTota

revenue

$ $000 $ $000

Purchased pantations 73,665 3,959 291,650 40,718 3,302 134,458

Heuan Pine Undertaking 32,426 1,692 54,864 64,189 1,602 102,833

Panted pantations 5,276 1,149 6,060 3,106 1,139 3,538

Total 111,367 3,166 352,574 108,013 2,230 240,829


27/67


Revenue from saes of wood chips decreased 41.0% to $83.9 miion in 2006; this decrease was due to a decine of 43.4%in the voume of wood chips sod, partia offset b a 4.2% increase in the average seing price per bone dr metric ton

(BDMT) in 2006. Saes voume decined during the ear for two reasons. First, in Q4 2005, one of the two authorized

intermediaries who processed wood chip for us was acquired and ceased to provide wood chipping services to us.

Second, in Q4 2006, the voume of wood chips processed b the remaining authorized intermediar decreased as the

authorized intermediars wood chipping capacit was not avaiabe to us. Management is of the view that the wood chip

revenue wi continue to decine over the next few quarters if we are not abe to access to the wood chipping capacit. We

sti retain the abiit to acquire the same voume of fibre that was previous processed into wood chips and we pan to

utiise the fibre in our own manufacturing faciities in the future.

Revenue from commission income, which is incuded in wood chips and ogs, decreased 42.5% to $5.6 miion in 2006 due

to a decrease of approximate 44.0% of voume shipped to customers upon which agenc fees are earned, from 657,830

BDMT in 2005 to 368,640 BDMT in 2006, despite an improvement in the agenc fee rate of 2.7% from US$14.8 per

BDMT in 2005 to US$15.2 per BDMT in 2006.

Wood chips and ogs saes comprised 14.0% of tota revenue in 2006, compared to 31.6% of tota revenue in 2005.

Imported Wood Products

Revenue from saes of imported wood products increased 112.0%, from $84.1 miion in 2005 to $178.4 miion in 2006.

This increase was primari due to higher demand of imported ogs.

Manufacturing and Other Operations Revenue

Revenue from our manufacturing and other operations increased 92.8% from $12.5 miion in 2005 to $24.0 miion in

2006 main due to higher revenue from fooring operations.

Cost of SalesCost of saes increased 26.4%, from $356.4 miion in 2005 to $450.5 miion in 2006. This increase was due primari to

higher saes voumes of standing timber, imported wood products and manufacturing products.

Wood Fibre Operations Cost of Sales

Standing timber cost of saes increased 31.5%, from $140.2 miion in 2005 to $184.4 miion in 2006. The increase

refected primari the 27.6% increase in cost of saes per hectare of standing timber from $1,298 per hectare in 2005 to

$1,656 per hectare in 2006, because we sod substantia more hectares of purchased pantations in 2006 compared to

2005, which had a higher average cost per hectare.

Wood chips and ogs cost of saes decreased 42.7%, from $122.9 miion in 2005 to $70.5 miion in 2006. The decrease

resuted primari from ower saes voume, partia offset b an increase in the cost of wood chips.

Imported wood products cost of saes increased 111.7%, from $81.9 miion in 2005 to $173.3 miion in 2006, primari

refecting an increase in the saes voumes of our imported og trading business.

Manufacturing and Other Operations Cost of Sales

The cost of saes of manufacturing and other operations increased 94.8% from $11.5 miion in 2005 to $22.3 miion in

2006, primari due to an increase in the saes from the fooring operation.

Gross ProfitGross profit increased 42.1%, from $136.9 miion in 2005 to $194.5 miion in 2006. Gross profit margin (gross profit as a

percentage of tota revenue) increased from 27.7% in 2005 to 30.2% in 2006 main due to the higher proportion of saes

of standing timber which earn a higher gross profit margin than our other business segments.

Wood Fibre Operations Gross Profit

Gross profit margin from saes of standing timber increased from 41.8% in 2005 to 47.7% in 2006, as the saes mix of

standing timber changed. In 2005 we sod more hectares from the Heuan Pine Undertaking at ower margin compared to

the hectares sod in 2006.

Gross profit margin from saes of wood chips and ogs (excuding commission) increased from 15.9% in 2005 to 16.5% in

2006 as a resut of higher seing prices, partia offset b higher average cost of wood chips.


28/67



Gross profit margin from saes of imported wood products increased sight from 2.7% in 2005 to 2.9% in 2006.

Manufacturing and Other Operations Gross Profit

Gross margin from our manufacturing and other operations decreased from 8.0% in 2005 to 7.1% in 2006, primari due

to increased cost of production at our particeboard pant.

Selling, General and Administration ExpensesOur seing, genera and administration expenses increased 79.1%, from $21.2 miion in 2005 to $37.9 miion in 2006,

due primari to increased compensation costs as a resut of a $5.4 miion termination pament made to an officer in

December 2006 pursuant to his empoment contract and additiona staff compiment.

Depreciation and AmortisationDepreciation and amortisation increased 28.3%, from $3.1 miion in 2005 to $4.0 miion in 2006, refecting the increase

in depreciation charges for our fooring manufacturing pant.

Income from OperationsIncome from operations increased 35.5%, from $112.6 miion in 2005 to $152.6 miion in 2006, due to the factors

expained above. Our income from operations as a percentage of revenue increased from 22.8% in 2005 to 23.7% in

2006.

Interest ExpenseInterest expense increased 28.8%, from $29.0 miion in 2005 to $37.3 miion in 2006, due primari to interest charged

on the $150.0 miion sndicated oans drawn down during 2006.

Amortisation of Deferred Financing CostsDeferred financing costs increased 35.9%, from $1.3 miion in 2005 to $1.8 miion in 2006 due to higher amortisation of

deferred financing costs for the sndicated oan obtained during the ear.

Other Exchange GainsExchange gains increased from $1.3 miion in 2005 to $3.7 miion in 2006 due to appreciation of the Renminbi against

the U.S. doar in 2006.

Interest Income

Our interest income increased 55.2%, from $4.2 miion in 2005 to $6.5 miion in 2006, due to higher cash and cash

equivaents and short-term deposits hed throughout the ear.

Provision for Income TaxesIn 2006, the provision for income taxes was $13.5 miion compared to $7.3 miion in 2005; the increase was due to the

higher income earned.

Net IncomeAs a resut of the foregoing, net income for 2006 increased 36.4%, from $81.7 miion in 2005 to $111.5 miion in 2006.

And overa net profit margin increased from 16.6% in 2005 to 17.3% in 2006.


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RESULTS OF OPERATIONS Q4 2006 VS Q4 2005The foowing tabe sets forth the seected financia information for the three months ended December 31, 2006 and 2005.

Three months ended December 31, 2006 2005

(in thousands, except earnings per share) $ $

Revenue 250,306 170,411

Cost of saes (165,370) (125,618)

Gross profit(1) 84,936 44,793

Net income from operations 63,242 35,071

Net income 42,528 27,535

EBITDA(2) 148,703 96,108

Basic earnings per share(3)(4) 0.31 0.20

Diuted earnings per share(3)(4) 0.30 0.20

The foowing tabe sets forth the breakdown of our revenue for the fourth quarter ended December 31, 2006 and 2005

Three months ended December 31,

2006 2005

$000 $000


Standing timber 167,869 95,824

Imported wood products 55,528 28,386

Wood chips and ogs 17,109 39,016

Manufacturing and Other Operations 9,800 7,185

Total Revenue 250,306 170,411

Revenue for the fourth quarter ended December 31, 2006 increased b 46.9% to $250.3 miion compared to $170.4

miion in the fourth quarter of fisca 2005. The increase was primari due to higher saes of standing timber and imported

wood-based products, partia offset b a decine in wood chips and ogs revenue.

In the fourth quarters ended December 31, 2006 and 2005, standing timber saes were as foows:

Three months ended

December 31, 2006

Three months ended

December 31, 2005

HectareSales per

hectareTotal

revenue HectareSaes per

hectareTota

revenue

$ $000 $ $000

Purchased pantations 40,987 3,923 160,811 21,807 2,966 64,688

Heuan Pine Undertaking 2,768 1,756 4,861 18,103 1,616 29,262

Panted pantations 1,821 1,206 2,197 1,634 1,147 1,874

Total 45,576 3,683 167,869 41,544 2,307 95,824

In the fourth quarter of 2006, saes of standing timber increased to 45,576 hectares, primari due to increased saes of

standing timber from our purchased pantations. The increase in the average seing price of standing timber was due to a

higher proportion of saes from purchased pantations, which commanded a higher price due to a higher ied compared

to 2005.

In the three months ended December 31, 2006, the decrease in revenue from wood chips and ogs was main due to a

53.9% decrease in shipments to 151,490 BDMT for the reasons discussed above. This decrease was partia offset b an

increase in price of wood chips; the average net wood chip price in the fourth quarter of 2006 was approximate $112.5

per BDMT compared to $106.4 per BDMT in the fourth quarter of 2005.

Revenue from commission income decreased 100.0% from $1.7 miion in the fourth quarter of 2005 to ni in the fourth

quarter of 2006 as a resut of a decrease in shipments from 115,000 BDMT to ni BDMT.


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In the fourth quarter of 2006, revenue from our imported wood products business amounted to $55.5 miion, comparedto $28.4 miion in the fourth quarter of 2005. The increase was primari attributabe to the increase in saes of imported

ogs.

Costs and expenses were $187.1 miion in the fourth quarter of 2006, an increase of 38.2% compared to $135.4 miion

in the fourth quarter of 2005. The increase in cost of saes was arge attributabe to an increase in saes in the fourth

quarter of 2006. Seing, genera and administration expenses increased 130.0% to $20.6 miion in the fourth quarter in

2006 primari due to higher compensation costs as discussed above.

Net income increased 54.5% from $27.5 miion to $42.5 miion. Diuted earning per share increased 52.6% from $0.20

to $0.30.

LIQUIDITy AND CAPITAL RESOURCESOur primar sources of funding have been short-term and ong-term borrowings, equit offering and cash provided b

operating activities. Our primar uses of funding have been to obtain new forestr pantations either in the form of standing

timber or ogs, to deveop our existing forestr pantations, for imported ogs trading, for working capita requirements, to

service our short-term and ong-term borrowings and to invest in and deveop our manufacturing faciities.

Cash FlowsThe foowing tabe sets forth a condensed summar of our statement of cash fows.

years ended December 31, 2006 2005

(in miions) $ $

Cash fows from operating activities

Net cash provided b operations(5) 298.5 228.1

Net change in working capita(6) (9.2) (31.6)

Total 289.3 196.5

Cash fows used in investing activities (422.8) (301.4)

Cash fows from financing activities 177.1 11.5

Effect of exchange rate changes on cash and cash equivaents 0.9 0.7

Net increase (decrease) in cash and cash equivaents 44.5 (92.7)

Cash Flows from Operating Activities

Cash fows from operating activities increased 47.3% to $289.3 miion in 2006. The increase was the resut of an increase

in cash provided b operations as a resut of the stronger saes of standing timber.

Cash Flows Used in Investing Activities

In 2005 and 2006, cash fows used in investing activities were primari used for capita expenditures to obtain additiona

forestr pantations and for investments in manufacturing faciities. Our cash outas for our forestr pantations amounted

to $265.2 miion in 2005 and $415.1 miion in 2006. Our cash outas for our manufacturing faciities and other capita

assets amounted to $16.6 miion in 2005 and $9.6 miion in 2006. Decrease in non-pedged short-term deposits in

2006 amounted to $11.9 miion compared to an increase in non-pedged short-term deposits of $5.2 miion in 2005.

In addition, Sino-Forest provided a subordinated oan of $15.0 miion to Mandra Forestr Hodings limited in the second

quarter of 2005.

Cash Flows From Financing Activities

In 2006, cash fows from financing activities consisted of an increase in bank indebtedness of $29.2 miion and ong-term

debt of $150.0 miion and decrease in pedged short-term deposits of $0.4 miion offset b an increase in deferred

financing costs of $3.0 miion. In 2005, cash fows from financing activities consisted of an increase in bank indebtedness

of $12.5 miion offset b a decrease in pedged short-term deposits of $1.0 miion.

Financing Arrangements and Contractual ObligationsAs of December 31, 2006, we had secured and unsecured short-term iabiities of $71.0 miion, comprised of $21.5

miion of short-term bank oans and $49.5 miion of trust receipt oans. We had ong-term debts of $450.0 miion. Our

borrowings were denominated in US doars and Renminbi.


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Short-Term BorrowingsAs of December 31, 2006, we had $90.6 miion short-term credit faciities with banks in Hong Kong and the PRC to fund

short-term working capita requirements of which $71.0 miion was being utiised. Interest is paabe on these short-term

borrowings at rates ranging from 3.9% to 12.3% per annum, and the borrowings are either repaabe on demand or due

in ess than one ear. As of December 31, 2006, the short-term credit faciities were secured b certain of our and-use

rights, buidings and timber hodings having an aggregate net book vaue of approximate $6.9 miion and certain bank

deposits of $6.1 miion.

Other Contractual Obligations

As of December 31, 2006, we had other contractua obigations reating to: (1) approximate $25.0 miion in respect of

capita contributions to our WFOEs; (2) $12.3 miion of capita commitments with respect to buidings, timber hodings, and

pant and machiner; (3) $17.5 miion of purchase commitments main regarding ogs, (4) commitments under operatingeases of approximate $41.4 miion, and (5) $450.0 miion non-convertibe guaranteed senior notes and sndicated oans.

Scheduled Maturit of Contractual Obligations

The foowing tabe presents the schedued maturities of our contractua obigations as of December 31, 2006.

Anticipated Pament Dates

Tota 2007 2008 2009 2010 2011 Thereafter

$000 $000 $000 $000 $000 $000 $000

long-term debts(7) 450,000 37,500 412,500

Capita contributions 25,000 25,000

Capita commitments(8) 12,305 12,305

Purchase commitments 17,538 17,538

Operating eases(9) 41,390 1,720 1,348 1,244 1,193 1,187 34,698

Total contractual

cash obligations 546,233 56,563 1,348 1,244 38,693 413,687 34,698

Guarantees

We aso periodica issue guarantees to third parties in reation to the debt of our subsidiaries. As of December 31, 2006,

we had provided guarantees of approximate $77.0 miion to banks in connection with credit faciities granted to our

subsidiaries. These guarantees expire at the maturit of the undering debt, which are for varing terms of ess than one

ear, uness the undering debt is renewed.

Historical and Planned Capital ExpendituresThe foowing tabe sets forth the breakdown of our capita expenditures for the fourth quarter and ear ended

December 31, 2006.

Three months ended

December 31, 2006

Twelve months ended

December 31, 2006

(in miions) Hectares $ Hectares $

Tree acquisition Purchased pantations 40,485 155.6 113,411 365.5

Tree acquisition Heuan Pine Undertaking 15,865 17.7

Re-panting and maintenance of pantations 4.9 24.0Pane manufacturing and other operations 1.8 9.6

Total 162.3 416.8

Capita expenditures incurred in reation to forestr pantations were for obtaining additiona purchased-tree pantations

and panted-tree pantations, and a variet of pantation management costs, incuding and ease costs, the costs of

panting, deveoping seedings, fertiisation, insecticide, abor and pantation maintenance service fees. Capita expenditures

in reation to the manufacturing pants were for investing in manufacturing pants, incuding the costs of constructing the

faciities and purchasing and instaing production ine equipment.

Forestr pantations capita expenditures for 2007 are expected to exceed $300 miion.


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Capita expenditures in 2007 reating to the manufacturing operations are expected to be approximate $30.0 miionfor the competion of the particeboard faciit in Gaoao, the fooring operation in Suzhou and additiona vaue-added

processing in Hunan province and Inner Mongoia.

Once competed, the manufacturing operations in Gaoao wi be one of the argest particeboard mis in China. Tota

production capacit wi be 275,000m3 of particeboard and 6,400,000m2 of meamine amination capacit.

The faciit is expected to be competed b the end of the second quarter of 2007, and wi be in production during the

second haf of 2007.

It is expected that 2007 capita expenditures wi be funded primari b cash fows from operations.

Independent Valuation of our Forest Assets b Pr

Pr Forest Industr ltd (Pr) has determined the vauation of our forest assets as at December 31, 2006 to be $919.0miion. This is the resut of a vauation of the existing panted and purchased areas using a 11.5% discount rate appied to

rea, pre-tax cash fows. As at ear end 2006, the book vaue of our timber hodings was $752.8 miion.

Pr has aso prepared an existing forest vauation that incudes the revenues and costs of re-estabishing and maintaining

the pantation forests for a fift-ear period (perpetua rotation vauation). Sino-Forest has an option to ease the and at

purchasedtree pantations for future rotations, the terms of which have et to be agreed. Pr has determined the

vauation of our forest assets based on a perpetua rotation (incuding the panned expansion in Hunan) using a pre-tax

discount rate of 11.5% to be $1,427.6 miion as at December 31, 2006.

The compete vauation report b Pr dated March 15, 2007 can be found on Sino-Forest website at www.sinoforest.com

under Fiings or can be obtained on SEDAR at www.sedar.com.

Aging of Accounts ReceivableWe recognise revenue from saes of standing timber when the buer has signed the saes contract. The buer is genera

responsibe for ogging and hauing the timber from the pantations. After the buer has entered into the saes contract, we

genera give the buers of our standing timber up to eighteen months to og and hau the timber from the pantations,

and genera grant buers a credit period of up to nine months from the date of the saes contract. We genera require a

partia pament of approximate 20% of the purchase price within 60 das of the saes contract, and pament of 40% of

the purchase price within 150 das of the saes contract and the remaining 40% within nine months of the saes contract.

In addition, we have credit evauation on customers as necessar and has monitoring processes intended to mitigate credit

risk and maintain appropriate provisions for potentia credit osses. We beieve these measures mitigate our credit risks in

our saes of standing timber. We genera grant our customers in our trading activities credit terms of 60 das for domestic

saes of wood chips through authorized intermediaries, and 30 to 120 das with respect to domestic saes of imported ogs

and wood-based products. As a resut, we ma have arge outstanding baances of accounts receivabe with respect to saes

of wood chips, wood-based products and standing timber. The foowing tabe sets forth an aging anasis of our accounts

receivabe for 2006 and 2005.

Aging Analsis

Tota

Accounts

Receivabe

0-30

Das

31-60

Das

61-90

Das

91-180

Das

181-360

Das

Over One

year

$000 $000 $000 $000 $000 $000 $000

At December 31, 2006 125,307 84,739 33,651 5,118 1,610 189

At December 31, 2005 119,989 55,216 38,695 22,546 3,030 502

InflationInfation in the PRC has not had a significant impact on Sino-Forests resuts of operations in recent ears. According to the

Nationa Bureau of Statistics in the PRC, the change in the Consumer Price Index in the PRC was 3.9%, 1.8% and 1.5% in

2004, 2005 and 2006, respective.


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TaxationPRC WFOEs and CJVs are governed b the Income Tax laws of China concerning Foreign Investment Enterprises and

Foreign Enterprises and various oca income tax aws (Income Tax laws). Pursuant to the Income Tax laws, WFOEs,

Sino-foreign equit and CJV enterprises are subject to corporate income tax at an effective rate of 33% (30% state income

taxes pus 3% oca income taxes) on income as reported in their statutor financia statements. The PRC WFOEs and CJVs

are eigibe for an exemption from state and oca income taxes for two ears starting from the first profitabe ear of

operations after offsetting osses carried forward from prior ears, foowed b a 50% exemption in the next three ears.

Subject to the approva of the reevant authorities, foreign invested enterprises categorised as forestr projects ma be

aowed a 15% to 30% reduction of the amount of income tax paabe for a further period of 10 ears after tax hoidas.

Sino-Forests tax charges for the ears ended December 31, 2006 and 2005 were $13.5 miion and $7.3 miion, respective,

which represented effective tax rates of 10.8% and 8.2%, respective. Such effective tax rates are significant ower

than appicabe corporate income tax rates because the majorit of income remitted to Sino-Forest from authorized

intermediaries were aread taxed. We beieve we have made adequate tax provisions to meet Sino-Forests tax iabiities as

the become due.

OFF-BALANCE SHEET ARRANGEMENTSOther than a currenc swap agreement with respect to interest paabe over the next five ears on the non-convertibe

guaranteed senior notes, Sino-Forest does not have an outstanding derivative financia instruments or off-baance sheet

guarantees. In addition, we are not otherwise engaged in hedging activities and had no forward exchange contracts

outstanding as of December 31, 2006. In the ordinar course of business, we enter into operating ease commitments,

capita commitments and other contractua obigations. These transactions are recognised in our financia statements

in accordance with Canadian GAAP, and are more fu discussed above.

TRANSACTIONS WITH RELATED PARTIESPursuant to the respective service agreements, Sino-Forest pas the saaries of certain executive officers in the form of

consutanc fees to companies controed b the executive officers. The consutanc fees incurred in 2006 amounted to

$4,136,000 [December 31, 2005 $2,737,000].

In addition, as at December 31, 2006, we had an aggregate amount of $3,150,000 [December 31, 2005 $2,129,000]

owed to these reated companies.

QUARTERLy FINANCIAL INFORMATIONOur business is seasona. Genera, the third and fourth quarters together account for approximate 60% of annua

revenue, whie the first and second quarters together account for approximate 40% of annua revenue. This refects the

preference of timber companies to take advantage of the peak growing seasons in the spring and summer before harvesting

the trees, and the difficut in the ogging and hauing of timber during the rain season in the first haf of the ear.

The foowing tabe is a summar of our seected quarter financia information for each of the eight quarters ended

December 31, 2006.

Earnings Per Share(3)(4)

Revenue Net Income Basic Diuted

(in thousands, except per share amounts) $ $ $ $

2006

December 31 250,306 42,528 0.31 0.30

September 30 188,535 45,104 0.33 0.32

June 30 107,274 14,360 0.10 0.10

March 31 98,864 9,464 0.07 0.07

2005

December 31 170,411 27,535 0.20 0.20

September 30 144,359 33,175 0.24 0.24

June 30 102,886 13,241 0.10 0.10

March 31 75,645 7,736 0.06 0.06


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CRITICAL ACCOUNTING ESTIMATESThe preparation of financia statements in conformit with Canadian genera accepted accounting poicies requires

management to make estimates and assumptions that affect amounts reported in the consoidated financia statements

and accompaning notes. Sino-Forests significant accounting poicies are described in Note 1 to the consoidated financia

statements. Each poic invoves a number of estimates and assumptions made b management. The Compan bases its

estimates on historica experience and various other assumptions that are beieved to be reasonabe in the circumstances,

the resuts of which form the basis for making judgments about the carring vaue of assets and iabiities. On an on-going

basis, the Compan evauates its estimates. Different accounting poicies, or changes in estimates or assumptions, coud

potentia have a materia impact, positive or negative, on Sino-Forests financia position and resuts of operations. It is

reasonab possibe that circumstances ma arise which cause actua resuts to differ from management estimates. The

Compan beieves its most critica poicies and estimates are those reated to revenue recognition of standing timber and

wood chips, asset impairment of timber hodings, and capita assets and income tax provision.

Asset Impairment

Timber Holdings

Timber hodings represented 62.4% of the Compans consoidated tota assets as at December 31, 2006. Timber hodings

are carried on the Compans consoidated baance sheet at cost which incudes cost of oung trees, standing timber, and

panting and maintenance costs. The Compan reviews the recoverabiit of the carring vaue of its timber hodings on an

annua basis or whenever events or changes in circumstances indicate that the carr amount ma not be recoverabe. If the

sum of the future undiscounted cash fows expected to resut from the asset is ess than the assets carring vaue, asset

impairment must be recognised. Impairment osses on timber hodings are measured as the amount b which the carring

vaue of the asset exceeds its fair vaue.

The Compan beieves that accounting estimates reated to timber hoding impairment assessments are critica

accounting estimates because: (i) the are subject to significant measurement uncertaint and are susceptibe to change

as management is required to make forward-ooking assumptions regarding timber market demand and pricing, cost of

production such as harvesting costs, transportation costs, taxes and overhead costs, pantation risk such as fire, pest and

disease, frost and tphoons, pantation growth and ied, future ied deveopment and the Compans weighted average

cost of capita, and (ii) an resuting impairment oss coud have a materia impact on the Compans consoidated income

statement and the reported timber hodings amount in the Compans consoidated baance sheet.

To assist with its impairment assessments, the Compan engages an outside consutant to hep derive cash fow estimates

and to estimate the fair vaue of its existing timber hodings using discounted cash fow vauation mode.

If managements best estimate of ke assumptions were to change significant and the associated estimated future cash

fows were to materia decrease, Sino-Forest coud potentia experience future impairment charges and such charges

coud be materia.

Capital Assets

The Compan evauates the recoverabiit of the carring vaue of its capita assets on an annua basis or whenever indicators

of impairment exist. Indicators of impairment incude proonged operating osses or a decision to dispose of, or otherwise

change the use of, an existing capita asset. If the sum of the future undiscounted cash fows expected to resut from the

asset is ess than the assets carring vaue, asset impairment must be recognised. Impairment osses on capita assets are

measured as the amount b which the carring vaue of the asset exceeds its fair vaue.

The Compan beieves that estimates reated to capita assets impairment assessments are critica accounting estimates

because: (i) the are subject to significant measurement uncertaint and are susceptibe to change as management is

required to make forward-ooking assumptions regarding the impact of improvement pans on current operations, other new

business opportunities, particeboard market demand and pricing, forecasted production voumes and cost of production

assumptions on current and future business and (ii) an resuting impairment oss coud have a materia impact on the

Compans consoidated financia statements and the reported capita asset amount in the consoidated baance sheet.


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Revenue Recognition

Standing Timber

Sino-Forest ses standing timber at various stages of maturit to domestic wood deaers from its tree pantations. Standing

timber revenue represents a significant portion of the Compans consoidated revenue. The timing or recognition of revenue

from standing timber saes is dependent on the terms and conditions of the Compans contractua arrangements with its

customers. To date, substantia a of the Compans standing timber revenue has been recognised when the Compan

and the buer enter into a binding saes agreement. Tpica, prior to entering into the agreement, the Compan and the

buer wi have negotiated the approximate timber voume and the expected harvest ied associated with a specified

pantation area. The saes agreement tpica provides the buer with a fixed period of time over which the buer is

entited to harvest the timber on the specified pantation area and amounts due from the buer are fixed at the time of

entering into the agreement and are not subject to adjustment based on the actua amount of timber harvested b thebuer. Harvesting and a reated costs have to date been the responsibiit of the buer and the Compan has not been

responsibe for an further significant acts of performance under the saes agreement. The buer has borne a risks and

rewards reated to the timber on the specified pantation area over the harvest period.

A future change to the tpica contractua arrangements for timber saes coud materia impact the timing and manner

in which revenue is recognised.

Wood Chips

We conduct our saes of wood chips from timber suppies sourced in the PRC through domestic wood deaers who act as

our authorized intermediaries to purchase timber suppies and se processed wood chips to customers. During most of

2006, we engaged one third-part wood deaer as our authorized intermediar. The suppiers are genera state-ownedor coective-owned wood farms in the PRC and the customers are tpica pup and paper mis, as we as reconstituted

wood pane mis.

Revenue from the sae of wood chips is recognised when the products are processed b the authorized intermediar on our

behaf. We reguar evauate the facts and circumstances in reation to the criteria within appropriate accounting guideines

and use our best judgment to determine whether to report on a gross or net basis for wood chips processed b authorized

intermediaries. Current, the facts and circumstances surrounding the wood chips business support the reporting of the

saes on a gross basis as the Compan acts as a principa to the transaction. The saes and cost of saes reating to this

business reported on a gross basis in 2006 was $83,894,000 and $69,973,000 respective [2005 $142,301,000 and

$119,208,000]. Commission income reating to wood chips saes represents transactions when the Compan acts as an

agent to the transaction and is recorded on a net basis. Commission income is recognised when the services are rendered.

Provision for Tax Related LiabilitiesTwo of the Compans principa operating subsidiaries incorporated in the British Virgin Isands (the BVI Subsidiaries)

are engaged in the sae of wood chips and standing timber and earning commission income (Authorized Saes Activities)

in the PRC through authorized intermediaries (AI) that are domestic enterprises. In accordance with Income Tax laws,

foreign companies deriving income from sources in the PRC are subject to foreign enterprise income tax. Under the terms

of the master agreements, reevant saes and purchase contracts and commission agreements made with the AI, the AI are

responsibe for paing a PRC taxes

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Sino-Forest 2006 Annual Report

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