Keep an eye on paper maker Nine Dragons for profit rebound, says BAML

China’s paper sector is looking up despite weathering recent creases caused by the precipitous drop in the yuan.

Following a period of intense volatility in the yuan, paper companies in mainland China saw profits dragged down by foreign-exchange losses. Nine Dragons announced an exchange loss of about one billion yuan in the second half of last year, causing its profits to drop to 310 million yuan, which was 54 per cent of its net profit in the same period of 2014.

Yet paper firms are far from folding, analysts say, with stable demand and government policies aimed at tackling sectors struggling with overcapacity.

Excluding foreign exchange losses, Nine Dragons reported a profit increase of 780 million yuan or nearly 150 per cent from the same period the year before.

“It’s quite rare in the Chinese economy. You don’t have a lot of industries [where] the core results are in fact improving,” said Ivan Li, analyst at Tung Shing Securities. “The labour cost is always rising, but generally [they are] trying to replace more workers by machines, so maybe that’s one of the reasons. The industry is facing an interesting situation.”

This year, a mild recovery in demand on the back of strong e-commerce growth and a shift to high-end food and beverages will help boost utilisation by 88 per cent and prices 4 to 5 per cent, according to a report by Bank of America Merrill Lynch analysts Matty Zhao and David Ching. Production capacity would also drop up to 2 per cent from 2015 to 2017, the report said.

The government’s recent moves to clear inefficient firms in the sector had helped prices to firm up slightly, analysts said.