20180920-中国银河国际证券-理文造纸-02314.HK-Rivals_results___guidance_show_the_market_is_not_as_weak_as_expected._BUY._5页_1mb

Lee & Man Paper [2314.HK] Summary

Core Content

Lee & Man Paper (LMP) is a paper manufacturing company that has been evaluated for its performance and future outlook. The report highlights that despite a challenging environment, the industry is not as weak as initially expected, supporting a BUY rating. LMP is expected to expand its packaging paper capacity in Vietnam, reaching 6.53m tonnes by the end of 2019, an increase of 8.3%.

The company's tissue paper business is identified as a key growth driver, with stable profitability despite high pulp costs, attributed to economies of scale. Management is adopting effective marketing strategies, such as selling own-brand products and using online channels for promotion. The tissue paper segment is also considered a potential candidate for spin-off, offering long-term growth opportunities.

Main Points

• Market Outlook: Rivals' results and guidance indicate the market is not as weak as expected, aligning with a constructive view of LMP.
• Capacity Expansion: LMP will add 0.5m tonnes of packaging paper capacity in Vietnam, increasing total annual packaging paper capacity to 6.53m tonnes by 2019.
• Cost Challenges: RMB depreciation and US tariffs on waste paper imports are expected to increase production costs, but LMP is confident in passing these on to downstream users.
• Profitability: While there are negative factors affecting the industry, the report believes LMP will outperform smaller players due to its strong market position.
• Tissue Paper: This segment is a growth driver with stable profitability and potential for spin-off.
• Financial Performance:
  • Revenue is projected to grow from HKD 17,615.6m (2015) to HKD 33,350.0m (2019E), with a CAGR of 12.1%.
  • Net profit is expected to rise from HKD 2,331.8m (2015) to HKD 5,720.9m (2019E), with a CAGR of 1.3%.
  • Gross margin is expected to decrease slightly from 29.1% (2017) to 25.6% (2019E), but remains stable in the tissue paper segment at 28.0%.
• Valuation:
  • LMP is currently trading at 6.3x 2018E PER, with a 5.4% yield.
  • The target price is HK$10.03, based on an 8x 2018E PER, which is below the average of its listed peers.
• Share Price Performance:
  • The current share price is HK$7.89 (Sep 19, 2018).
  • The target price is HK$10.1, implying a potential 28% increase.
• Key Financial Metrics:
  • Net Gearing is expected to decrease from 65.6% (2018F) to 37.4% (2019F), indicating improved financial leverage.
  • Free cash flow per share is projected to increase from HKD 0.3 (2018F) to HKD 1.4 (2019F), suggesting stronger cash generation.

Key Information

• Market Cap: US$4,445m
• Shares Outstanding: 4,448m
• Auditor: Deloitte Touche
• Free Float: 29.1%
• 52-Week Range: HK$6.59–HK$10.44
• 3-Month Average Daily Turnover: US$7.3m
• Major Shareholder: Raymond Lee (30.5%)
• Analysts:
  • Mark Po, CFA – Senior Analyst
  • Wong Chi Man, CFA – Head of Research

Investment Highlights

• Capacity Expansion Discipline: Nine Dragons Paper has delayed production and reduced expansion plans to avoid over-investment due to tight raw material supply and environmental constraints.
• Cost Pass-Through: Despite unfavorable supply/demand dynamics, the company is confident in passing on rising costs to downstream users.
• Tissue Paper Growth: Tissue paper remains a key growth driver with stable profitability and growth potential.
• Earnings Projection: Earnings are expected to grow gradually, with net income increasing from HKD 5,649.3m (2018E) to HKD 5,720.9m (2019E).
• Dividend Yield: The dividend yield is expected to increase from 5.39% (2018E) to 6.20% (2019E).
• Free Cash Flow Yield: Expected to rise from 12.93% (2018E) to 18.09% (2019E).

Key Assumptions

• Revenue: Expected to grow from HKD 17,615.6m (2018E) to HKD 33,350.0m (2019E).
• Gross Profit: Projected to increase from HKD 8,329.8m (2018E) to HKD 8,528.6m (2019E).
• Net Profit: Expected to rise from HKD 5,649.3m (2018E) to HKD 5,720.9m (2019E).
• Free Cash Flow: Anticipated to increase from HKD 7,166m (2018F) to HKD 7,849m (2019F).
• Capital Expenditure: Expected to decrease from HKD 2,600.0m (2018F) to HKD 1,500.0m (2019F).

Conclusion

LMP is positioned for continued growth, particularly in the tissue paper segment, with a disciplined approach to capacity expansion. Despite challenges such as RMB depreciation and US tariffs, the company is expected to maintain profitability and outperform smaller players. The BUY rating is based on the company's strong market position and potential for long-term growth. The target price of HK$10.03 reflects a valuation based on an 8x 2018E PER, suggesting undervaluation compared to its historical average and listed peers.