20131010-DBS_Group-China___Hong_Kong_Company_Focus_12页_257kb

Summary of Nine Dragons (2689 HK) Research Report

Core Content

This report provides an in-depth analysis of Nine Dragons (2689 HK), a container board manufacturer in the Forestry & Paper sector. The report outlines the company's strategic shift toward enhancing profitability and reducing financial risk, particularly its net debt-equity ratio. It highlights the current financial performance, future projections, and market outlook, while also addressing investor concerns and potential risks.

Main Points

Strategic Shift and Financial Health

• Debt Reduction Strategy: Management is committed to reducing the net debt-equity ratio to 70-80% by 2016, which is currently at 120% in FY13.
• Cost Management: The company has implemented measures to lower finance costs, including the discontinuation of bill discount and refinancing high-cost debt with lower-cost loans. It aims to reduce its effective interest rate from >5% to 4.2-4.5% in FY14 and further to 4% in FY16.
• Capital Expenditure: The company plans to add 35,000 tons of daily capacity from 2014-2016, with capex expected to decrease significantly from Rmb2bn in FY14 to Rmb1bn in FY16.
• Debt Structure: ND's borrowings, including foreign currency loans, are primarily from Chinese banks without covenants, and the gearing ratio remains stable at 55-65%, indicating lower credit risk.

Earnings and Valuation

• Earnings Growth: Earnings per share (EPS) in HK$ are expected to grow from 0.39 in 2013 to 0.63 in 2015, with a projected 23% increase in FY14 and 20.9% in FY15.
• Profit Margins: Net profit margin is expected to rise from 5.4% in 2013 to 6.8% in FY15, driven by cost savings and improved efficiency.
• Valuation Metrics: The price-to-earnings (PE) ratio is projected to decrease from 12.7x in 2013 to 10.4x in FY14 and 8.6x in FY15. The price-to-book (P/B) ratio has improved from 0.6x in 2013 to 0.8x in FY14.
• Target Price: The report recommends a 12-month target price of HK$6.80, with a current price of HK$5.40, implying a potential upside of 25.9%.

Market Outlook and Risks

• Short-Term Oversupply: The industry is currently facing short-term oversupply, which is expected to be resolved by FY14, leading to a stronger ASP rebound and improved net dollar margin in FY15/16.
• Long-Term Consolidation: The report believes the ongoing consolidation in the containerboard market will be favorable for ND in the long run, especially with the elimination of outdated capacity.
• Potential Risks: The main risks identified include interest rate hikes and Rmb depreciation, which could impact earnings. Around 20% of the foreign currency loan portfolio is hedged against these risks.

Key Information

Financial Highlights

• Turnover: Expected to grow from RMB28,739m in 2013 to RMB33,911m in 2015.
• EBITDA: Projected to increase from RMB4,949m in 2013 to RMB6,023m in 2015.
• Net Profit: Anticipated to rise from RMB1,561m in 2013 to RMB2,321m in 2015.
• EPS (HK$): Expected to grow from 0.42 in 2013 to 0.63 in 2015.

Operational Metrics

• Receivables: Debtors' turnover increased to 27 days in FY13 from 23 days in FY12, but the majority of trade receivables are guaranteed by banks.
• Inventory Turnover: Improved from 64.6 days in FY13 to 58.3 days in FY15.
• Current Ratio: Increased from 1.3 in FY13 to 1.6 in FY15, indicating better liquidity.

Peer Comparison

• PE Ratio: ND's PE ratio is lower than its peers, with a 13x FY14 PE compared to an average of 13.9x.
• P/B Ratio: ND's P/B ratio is expected to improve to 0.8x in FY14, compared to an average of 1.5x.
• ROAE: Projected to rise from 7.0% in 2013 to 9.3% in FY15.

Investment Outlook

• Rating: DBSV maintains a BUY rating with a target price of HK$6.80.
• Market Skepticism: Despite the negative share price reaction to FY13 results, the report believes this reflects market skepticism and offers a buying opportunity.
• Catalysts: Potential catalysts include higher ASP and stronger PMI, which could lead to improved earnings and profitability.

Conclusion

Nine Dragons is focusing on reducing financial risk and enhancing profitability through strategic cost-cutting measures. The company's financial health is improving, with a projected reduction in net debt-equity ratio and cost savings from lower finance costs. While there are short-term challenges such as oversupply and potential exchange losses, the long-term outlook is positive, driven by market consolidation and a rebound in ASPs. DBSV maintains a BUY rating with a target price of HK$6.80, based on conservative earnings assumptions and a favorable valuation compared to peers.