Cost efficient a rising competitive advantage
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.
Lee & Man Paper Manufacturing is an investment holding company. Through its subsidiaries, Co. is engaged in procurement of raw materials; and manufacturing and trading of paper and pulp and tissue products. Co.'s segments include: packaging paper, which include kraft linerboard, test linerboard, coated duplex board, white top linerboard and high strength corrugating medium; tissue paper and pulp.
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