company report
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.
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.