20161115-光大证券_香港_-玖龙纸业-02689.HK-Time_to_Accumulate_14页_139kb

Nine Dragons Paper (2689 HK) Summary

Core Content

Nine Dragons Paper (ND Paper) is a leading containerboard manufacturer in China and Asia, with a significant market presence and substantial production capacity. Established in 1995 and listed on the Hong Kong Stock Exchange in 2006, the company has been actively expanding its production capabilities and is currently one of the largest producers in the world in terms of design capacity.

Main Points

• Market Position: ND Paper is the largest containerboard manufacturer in China and Asia, with a total design capacity of 13.7 million tonnes per annum (tpa) as of FY2016.
• Product Range: The company primarily produces and sells a wide range of packaging paperboard products, including linerboard, high-performance corrugating medium, coated duplex board, and printing and writing paper products.
• Capacity Expansion: ND Paper has invested heavily in expanding its production capacity over the years. It plans to add new production lines, including a kraftlinerboard machine in Vietnam and a testlinerboard machine in Shenyang.
• Performance in FY2016: The company faced significant foreign exchange losses due to the depreciation of the RMB against the USD and Euro. Despite this, it managed to reduce its non-Rmb borrowings and stabilise its ASP (average selling price) and sales volume.
• Financial Outlook: The company expects its earnings to resume growth in FY2017E and onwards, with net profit projected to increase by more than double to Rmb2,448m in FY2017E and grow by 9% YoY to Rmb2,668m in FY2018E.
• Valuation: As of 14 November 2016, ND Paper's share price was HK$6.32, and it was valued at 10.5x 2017E PE, which is below the median of its peers. The target price is set at HK$7.20, representing a 13.9% upside potential.
• Valuation Metrics:
  • PE (2017E): 10.5x
  • PB (2017E): 0.98x
  • EV/EBITDA (2017E): 7.0x
• Key Risks: The company faces several risks, including exchange rate fluctuations, rising raw material prices, interest rate hikes, a slowing global economy, and intense competition.

Key Financial Highlights

Valuation and Peer Comparison

Key Financial Ratios

Investment Recommendation

• Recommendation: Accumulate
• Target Price: HK$7.20
• Upside Potential: 13.9%
• Reasoning: The company's earnings are expected to resume growth in FY2017E and onwards, with a target price that represents a 20% discount to its 5-year average PE.

Major Shareholder and Market Data

• Major Shareholder: Liu Ming Chung (72.8%)
• Free Float: 27.2%
• Market Cap (HK$ m): 9,676
• 12M Daily Turnover (HK$ m): 50.6
• Volatility (%): 51.3
• Yield (%): 2.4

Summary

Nine Dragons Paper is a leading player in the containerboard industry in China and Asia, with a strong production capacity and diverse product offerings. Despite facing challenges in FY2016, including significant foreign exchange losses, the company has taken steps to reduce exposure and stabilise its operations. The company's financial performance is expected to improve in the coming years, with a notable increase in net profit. The current valuation is considered undervalued compared to its historical averages and peer companies, supporting the Accumulate recommendation. Key risks include exchange rate fluctuations, rising raw material costs, and a slowing global economy.