Market Calls

PUBLISHED : Monday, 31 October, 2011, 12:00am
UPDATED : Monday, 31 October, 2011, 12:00am

The share price of Lee and Man Paper (2314) rose 36.5 per cent last week despite no news or fresh insights on the firm. The mainland paper maker's stock is volatile and features regularly in the top 10 of Hong Kong's weekly market movers.

Charlene Gu (Yuanta Research) says Lee and Man tracks the wider market in amplified fashion.

'If there is any expectation of a rebound in China, this sector will move the most,' says Gu.

She adds that Lee and Man was heavily targeted by short sellers prior to its recent price spurt. Now that China is showing signs of entering a 'loosening' phase - that is, authorities are putting money into the economy to stave off a recession - the short sellers are buying back the shares they previously sold, fuelling a rally.

Gu adds that the price of old corrugated boxes (which are recycled by Lee and Man and are a key input cost for its production) has dropped. 'The US imported price for was US$270 per tonne in September. In October it was US$240 - a big decline,' she says.

Gu says the firm has been caught in a sluggish patch and investors should be prepared for lacklustre numbers from the entity for a while longer. 'Everyone knows that their earnings will be bad and will miss consensus,' she says, adding that she expects profit declines will hit bottom in about a month's time, and then stage a recovery, but perhaps not a dramatic one.

Shaokang Li (CSC Securities) says Lee and Man compares favourably with Nine Dragons Paper (2689), China's largest paper maker and the natural point of reference for investors in the mainland paper industry. Li says both entities carry high debt loads but Lee and Man is in better shape. 'The debt-to-equity ratio is far lower for Lee and Man than Nine Dragons,' he says.

Li was not particularly surprised by the jump in the share price. 'The stock was undervalued ... but [last week's] sharp increase came for no special reason,' he says.

The views stated here are those of analysts, and are not stock calls by the South China Morning Post


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