20160712-中国银河国际证券-理文造纸-02314.HK-New_paper_products_to_drive_growth._Initiate_with_BUY_27页_1mb

Lee & Man Paper [2314.HK] Summary

Core Content

Lee & Man Paper (LMP) is a leading manufacturer and seller of paperboard packaging products, pulp, and tissue paper. It is the second largest containerboard manufacturer in China, with an annual capacity of 5.23m tonnes. The paper manufacturing industry is not closely tied to investment activity but is more closely related to local consumption. LMP is expected to benefit from China's consumption growth and supply-side reform policies, which aim to reduce overcapacity and improve industry efficiency.

Main Points

• Growth Drivers: LMP is positioned to benefit from new expansion plans and increased exposure to the tissue paper segment, which is a key growth driver in the paper industry.
• Tissue Paper Expansion: LMP expanded its tissue paper capacity from 140,000 tonnes in 2015 to 355,000 tonnes by the end of 2016, aiming to become one of the top five tissue paper companies in China. Tissue paper is expected to account for 14% of LMP's turnover in 2017.
• Valuation and Target Price: LMP is currently trading at 10.1X 2016 PER, which is considered undemanding. The target price is HK$7.0, based on a 12x 2016E PER, in line with its historical average and the average of its listed peers.
• Profitability: LMP has strong profitability with an average net margin of 14.7% over the last 10 years, significantly higher than its listed peers (4.4–7.4%). Its gross margin and ROE are also above the industry average.
• Supply-Side Reform Impact: The government's supply-side reform policy and environmental regulations are expected to reduce overcapacity and improve market dynamics. This will benefit major players like LMP and Nine Dragons Paper [2689.HK].
• Capacity Utilization: The utilization rate of the packaging paper industry is expected to improve from 83.6% in 2015 to 89.1% in 2018, driven by reduced capacity additions and improved demand.
• Industry Outlook: The paper industry in China is undergoing an inventory adjustment cycle and is expected to report slower growth in new capacity. However, the overall demand for paper is still positive, with a CAGR of 2.8% in 2016–2018.

Key Financial Highlights (2014–2018E)

Key Information

• Market Position: LMP is a major player in the packaging paper industry and is expanding its tissue paper operations.
• Tissue Paper Segment: LMP's tissue paper operations are expected to become a key growth driver, with a projected sales volume of 150,000 tonnes in 2016.
• Cost Advantages: LMP has in-house power and steam plants, internal pulp supply, and better infrastructure, which provide a cost advantage over its peers.
• Capacity Expansion: LMP's internal cash flow is sufficient to fund its current expansion plans. It is also expected to release a new expansion plan for 2017 and beyond, which could trigger upward revisions to its 2018 performance forecasts.
• Government Policy Impact: The government's focus on environmental protection and supply-side reform is expected to reduce overcapacity and increase the profitability of leading players.
• Risk Factors: Potential risks include lower-than-expected paper demand, faster-than-expected capacity expansion by peers, and a substantial increase in production costs.

Investment Rationale

• LMP is expected to grow at a 10.3% top-line CAGR and 10.9% bottom-line CAGR from 2016–2018.
• The company is well-positioned to benefit from industry consolidation and improved supply/demand dynamics.
• LMP's strong profitability and cost advantages make it a compelling investment in the paper manufacturing sector, especially with the ongoing supply-side reform in China.