CSCI-Paper-Lee & Man Paper (2314 HK)：Cost efficient a rising competitive advantage - 20180807

Cost efficient a rising competitive advantage

• Lee & Man Paper (“L&MP”) posted a solid set of interim results with net profit growth of 35.8% YoY, driven by a record high unit net dollar margin, beating both market and our expectations.
• We expect the company’s overall profitability to remain stable in the 2H of the year which tends to be the traditional high season. In anticipation of the continuous production efficiency improvement, we have raised our net profit estimates for FY18E/FY19E by 5.6%/5.9%, respectively.
• We believe L&MP has been oversold amid concerns about the industry new supply towards year-end. Since L&MP is currently trading at the low end of its historical PER range, which we deem attractive, our PT of HKD10.0, representing a target multiple of 8.3x/7.9x FY18E/FY19E PER, we reiterate our BUY rating.

Margins reached record high in 1HFY18. L&MP posted a record high interim EBITDA of HKD4.34bn or EBITDA/ton in absolute terms for containerboard was HKD1,430 (net dollar margin HKD1,003) and tissue paper was HKD1,873 (net dollar margin HKD1,072). Meanwhile, revenue jumped 43.1% YoY, mainly driven by higher sales volumes of CB products (+2.9% YoY) and tissue paper (+70.7% YoY) , and a 34.1% YoY increase in its average selling prices, in spite of RMB appreciation against the HKD during the period.

PM22 (Vietnam) plant to substantially boost overseas operation. L&MP announced that it plans to construct 500,000 tons of containerboard production facility in Vietnam (PM22), which is scheduled to commence operations by end-2019 and subsequently expected to raise Vietnam’s containerboard contribution to 13.7% (from 6.6%) of the group’s total in FY19E. Based on the latest company data, we estimate L&MP’s total containerboard capacity will reach 6.03mn tons by end-18 and 6.53mn tons by end-19. Meanwhile, the company announced that it has no plans to further expand the tissue production capacity once annual capacity reaches 795,000 tons. And regarding capex, which is currently primarily funded by its OpCF, we believe L&MP aims to maintain the FY18E net debt to equity ratio at a stable level of c.46.7%, in our estimates.

Traditional a high sales season approaching. We believe the Greater Bay Area Clean Air Action Plan is supportive for paper products prices in the mid-term, and moreover, given that L&MP targets to convert all of its production plants in Dongguan into gas-based production facilities by end-2019. Meanwhile, management remains optimistic about further inventory drawdown, which has been maintained at around two weeks, would support price hikes entering the high season, in anticipation of resilient downstream demand ahead. We have maintained our full-year sales volume assumption at 5.9mn tons, including 586,000 tons of tissues, for FY18E.

Reiterate BUY and PT of HKD10.0, representing 8.3x/7.9x to our FY18E/FY19E EPS estimates, respectively. Since L&MP is currently trading at the low-end of its historical range, we deem its valuation attractive. Based on the 25% dividend policy, we expect L&MP to achieve a FY18E yield of 3.7%. And in light of L&MP’s positive growth prospects, we believe there is room for re-rating of its valuation going forward.