company report

Topics: Paper, Paperboard, Corrugated fiberboard Pages: 14 (6298 words) Published: October 1, 2014
Equities

Hong Kong/China

Company Report

Initial Coverage

Nine Dragons Paper (2689 HK)

23 July 2013
China / Industrials / Paper

From fast expansion to debt reduction
We initiate coverage on Nine Dragons Paper (ND Paper) with an ACCUMULATE rating and a target price of HK$5.4, suggesting
11% upside potential. The rapid capacity expansion stage is
coming to a slow down and the company is expected to focus
more on debt reduction and raising profitability.




Entering 2H the traditionally strong season. Entering the
traditionally strong 2H, especially around the festive seasons, demand for containerboard is expected to pick up. Overall we expect demand for containerboards to grow 5% y/y in 2013.
The operating environment should be benefitted by lower raw
material prices and a slower release of new capacities in 2013. Expect slower capacity expansion over next three years...
In June 2013, ND Paper announced that it has basically
completed the strategic plan for establishing production bases in China and overseas. The rapid expansion stage is coming
to a slowdown and the company estimates its capex to
gradually decline from Rmb4.5bn in FY13 to Rmb2bn in FY15.



...and more debt reduction. By June 2016, ND Paper also
plans to reduce net-debt-to-equity to 70-80%. In other words, net gearing should have peaked by end of FY13 and will begin trending down. We estimate net finance cost per tonne to
lower from Rmb131 (end of FY12) to Rmb105 (end of FY15).
The reduction is expected to result in higher profitability.



Valuation Given a lack of economic stimulus policy for the
remainder of this year and potential headwinds in the Chinese economy, we believe ND Paper should trade at 1 standard
deviation below its historical average PE. The target multiple is thus 9.7x (at a 40% discount to 16.4x). Our target price of
HK$5.4 is based on FY14e EPS of Rmb0.44 (fiscal year-end
in June) and represents 11% potential upside. We initiate
coverage with an ACCUMULATE rating.

ACCUMULATE
Share
Price

Target
Price

Upside

HK$4.87

HK$5.4

11.0 %

(as of 22 Jul 2013)

Jeff Wong
(852) 2530 8306
jeff.wong@ebscn.hk
52 Range (HK$)
DVD yield %

3.09-7.94
1.82

Latest Key Data
FF no of shares (m)
FF (%)
FF market cap (HK$ m)
12M daily turnover (HK$ m)
12M volatility (%)
12M Hi/Lo (HK$)
PEG FY13-15E (x)
RoAE FY13 (%)
P/B FY13E (x)
Net debt/equity FY13E (%)

1,543
33.08
7,515
90.74
50.6
3.09-7.94
0.4
6.8
0.8
110

Performance (%)
Absolute
Relative to HSCEI

1M
3.0
1.0

YTD
(30.4)
(12.8)

12M
29.2
30.8

Major Shareholders (%)
Cheung Yan

66.25

Price Chart
Investment Summary
FY-end Jun
Turnover (Rmb m)
Growth (%)
Net Profit (Rmb m)
Growth (%)
EPS (RMB)
Growth (%)
PER (x)
OCF/Share (Rmb)
P/B (x)
EV/EBITDA (x)
DPS (Rmb)
Yield (%)

2011
24,387
35.9
1,968
(9.2)
0.42
(11.8)
9.1
0.62
0.9
9.6
0.10
2.6

2012
27,170
11.4
1,420
(27.8)
0.30
(27.9)
12.7
0.86
0.8
9.2
0.07
1.8

Source: Company data, CER estimate. Last updated on Jul 22

China Everbright Research Limited

2013E
32,368
19.1
1,512
6.4
0.32
6.4
11.9
0.29
0.8
8.2
0.07
1.9

2014E
36,496
12.8
2,037
34.7
0.44
34.7
8.8
0.68
0.7
7.3
0.10
2.6

2015E
40,524
11.0
2,509
23.2
0.54
23.2
7.2
0.79
0.7
6.5
0.12
3.2

(HK$)
9.00
8.00

Turnover (HK$ m)
700

NINE DRAGONS PAP
HSI

600

7.00
500

6.00
5.00

400

4.00

300

3.00

200

2.00
100

1.00
0.00
23-Nov

0
23-May

23-Nov

Source: Bloomberg, CER estimates

Please read the analysts and company disclosure and the disclaimer in the last page

23-May

CHINA / INDUSTRIALS / PAPER

Industry Outlook
Demand and Supply
Demand drivers
Containerboards are commonly used in the packaging of consumer goods like electronics, household appliances, footwear & apparel, and food & beverage. As such, demand for containerboard is...
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