Nine Dragons to invest 3b yuan in facilities for high-margin products

PUBLISHED : Tuesday, 22 January, 2008, 12:00am
UPDATED : Tuesday, 22 January, 2008, 12:00am

Nine Dragons Paper (Holdings), the mainland's biggest maker of containerboards, will invest up to three billion yuan in production facilities for wood pulp and liquid paper boards, which will be in commercial operation in 2010, company chairman Cheung Yan said yesterday.

Shares in Nine Dragons have fallen 34.99 per cent this month as analysts lowered their ratings over uncertainty about whether the company can sustain strong growth amid intense competition and weak export demand. Nine Dragons yesterday closed at HK$12.82, down 8.43 per cent. Fellow industry player Lee & Man Paper Manufacturing fell 1.94 per cent to HK$22.75.

'Investors are concerned about the business outlook of the company due to the gloomy outlook of global economy,' said Kenny Lau, an industry sector analyst at Credit Suisse. 'They are adjusting the price down to a cheaper valuation to reflect the uncertainty.'

Ms Cheung said yesterday company orders were full and it would benefit from lower costs if there was a slowdown in the United States.

'We can make more money when the US economy is not good because the cost of waste paper will be lower,' Ms Cheung told a Hong Kong press conference yesterday. 'It will help our profitability.'

Nine Dragons plans to invest 1.6 billion yuan in the next 2 1/2 years to establish a new production facility in Sichuan for high-value specialty paper. The plant can produce insulating paper and capacitor tissue paper products with an annual production capacity of 50,000 tonnes, and bleached wood pulp and bleached bamboo pulp with a capacity of up to 150,000 tonnes.

The company has acquired a small plant of specialty board and wood pulp with an annual capacity of 15,000 tonnes and 26,000 tonnes, respectively, in Sichuan for 18 million yuan.

It has an annual profit of 20 million yuan.

The company will also invest 1.4 billion yuan in Taichang to establish a liquid paper board production plant with an annual capacity of 520,000 tonnes.

Liquid paper board is a premium product with a higher selling price than normal packaging paper products.

'The company is diversifying its product offerings from traditional containerboard to other higher-margin products,' said chief financial officer Waltery Law.

'The company targets to raise its gross profit margin to 30 per cent after the new products launch, from 25 per cent at present.'

Mr Law said bleached wood pulp could have a gross profit margin of up to 40 per cent, while liquid paper could have a 25 per cent margin.

'Containerboard products seem to be expanding too much on the mainland and profit margins are on a downward trend,' said Mr Lau.

Mr Lau said Lee & Man Paper was also facing a downward trend in profit margin.

'We estimate Lee & Man's profit margin will be below 20 per cent to around 18 per cent this year,' he said.