20180801-中国银河国际证券-理文造纸-02314.HK-Strong_1H_2018_Results._Maintain_BUY.__5页_652kb

Lee & Man Paper (2314.HK) 1H 2018 Summary

Core Content

Lee & Man Paper (LMP) reported strong first-half (1H) 2018 results, exceeding market expectations and beating the full-year forecast for growth. The company's performance was driven by solid growth in both packaging paper and tissue paper segments, with particular emphasis on the latter as a growth driver. Despite challenges in the industry, LMP management remains optimistic about the company's profitability, citing factors such as waste paper price trends and effective cost management.

Key Financial Highlights

• 1H 2018 Revenue: HK$16.37 billion, up 43.1% YoY
• 1H 2018 Net Profit: HK$2.98 billion, up 35.9% YoY
• 1H 2018 Net Profit Margin: 18.2%
• 1H 2018 EPS (Basic): HK$1.26
• Interim Dividend: HK$0.20 per share, up from HK$0.17 a year ago
• Dividend Yield: 5.58%
• PER (Price-to-Earnings Ratio): 6.0x
• PBR (Price-to-Book Ratio): 1.4x
• FCF Yield: 13.37%

Capacity Expansion

• LMP is expanding its packaging paper capacity in Vietnam by 0.5 million tonnes, aiming to reach a total of 6.53 million tonnes by the end of 2019, an 8.3% increase.
• The expansion is aimed at capturing the shift of manufacturing activities from China to Southeast Asia.
• LMP has not announced any expansion plans for containerboard machines but indicated that spare cash flow will be used for investments in paper machines outside China and for its tissue paper business.

Tissue Paper Performance

• LMP's tissue paper business has annual capacity of 795,000 tonnes and is a key growth driver.
• The profitability of tissue paper remains stable due to economies of scale and the use of unbleached bamboo pulp, which has softened global pulp prices.
• Tissue paper sales volume in 1H 2018 was 268,000 tonnes, contributing significantly to the top and bottom lines.

Industry Outlook

• Management believes the industry environment is not as bad as the market expects, despite negative news flow.
• They anticipate that industry capacity increases will be lower than expected due to closures and more disciplined leading players.
• Waste paper prices are expected to drop, which may help maintain profitability in the second half of 2018.
• The RMB depreciation and higher-than-expected CAPEX are concerns, but the impact has been factored into the model without a major downward revision.

Investment Analysis

• The analyst maintains a BUY rating on LMP, with a new target price of HK$10.03, based on an 8x 2018E PER, which is in line with its historical average and lower than the average of its listed peers.
• The company is currently trading at 6.0x 2018E PER, offering a 5.6% yield.
• The company has a strong free cash flow and is well-positioned for future growth, especially in the tissue paper segment.

Key Assumptions and Projections

Conclusion

LMP's performance in 1H 2018 was robust, with strong revenue and net profit growth. The company is expanding its capacity in Vietnam to capture market opportunities and is leveraging its tissue paper business as a growth driver. Despite some concerns regarding RMB depreciation and industry CAPEX, the analyst believes these factors have been adequately considered and does not see a major downward revision in the model. The company is trading at a discount relative to its historical average PER, making it an attractive investment.