Hong Kong company reporting season

Papermaker Nine Dragons immune by ‘end of year’ to further yuan depreciation

80pc of company’s debt denominated in Chinese currency by year end, up from 59pc, after hefty exchange-rate losses last year

PUBLISHED : Thursday, 22 September, 2016, 5:50pm
UPDATED : Thursday, 22 September, 2016, 5:50pm

Nine Dragons Paper (Holdings) Limited, Asia’s largest containerboard manufacturer, expects to be immune from any further depreciation in the yuan, by the end of the year after an adjustment in its debt portfolio, according to chairwoman Cheung Yan, who described the currency’s recent falls as the company’s “biggest negative impact on earnings”.

Shares in the Guangdong-based company jumped 8.3 per cent to HK$7.44 on Thursday, their highest level since June 2015, a day after the firm posted record full-year sales and the payment of a special dividend.

Cheung said with a strong cash position, its yuan-denominated debt will make up 80 per cent of its total debt portfolio by the end of the year, up from 59 per cent as of June 30, as the firm progressively converts its foreign debt into yuan-denominated debt.

Its US-dollar debt composition is expected to fall from 8 per cent to 6 per cent, and debts in euro will drop from 33 per cent to 16 per cent, said executive director Zhang Chengfei.

With most of its demand and supply from within the country, as a result the company will not be as affected by currency risks, he said.

Borrowing costs in China are cheap after several interest rate cuts, and a further cut of 25 basis points could save the company 50 million yuan in interest payments
Zhang Chengfei, executive director, Nine Dragons

“Borrowing costs in China are cheap after several interest rate cuts, and a further cut of 25 basis points could save the company 50 million yuan in interest payments,” Zhang said.

Nine Dragons’ revenue for the financial year ended June 30 surged 6.6 per cent to 32.1 billion yuan, a historic high since listing in 2006, with sales reaching their best level.

The strong showing was put down to a recovery in prices following the shutdown of smaller rivals, the updating of its operations, and the country’s ongoing clampdown on newcomers to the often heavy-polluting industry.

On Tuesday the company revealed its gross profit rose to 18.3 per cent from 15.7 per cent a year earlier thanks to a drop in the price of chemicals and coal.

But net profit fell 20.5 per cent year on year to 1.12 billion yuan, due to exchange-rate losses following the central bank’s decision to improve its “central parity system” to better reflect market development in the exchange rate between the Chinese yuan against the US dollar in August 2015.

Excluding those currency factors, net profit would have jumped 106.6 per cent year on year to a historic high, the firm said in its file to the Hong Kong bourse.

The company is now predicting strong demand over the next three months, thanks to the country’s red-hot property market, Alibaba’s Single’s Day in November and Christmas, when demand for its products rise.

The company plans to raise the price of its paper products by 50 yuan per tonne in December, following a similar price rise in September.

“China’s papermaking industry does not face an overcapacity problem anymore. The market will be very healthy in future,” Cheung said, given the government has largely lifted requirements on environmental protection and capacity expansion.

Nine dragons declared an 8 fen final dividend per share, plus a special dividend of 3 fen for its ten-year listing anniversary. Adding the interim dividend paid of 2 fen, its total dividend of the year surged 86 per cent on a year ago.

Cheung said it will keep its dividend payout ratio above 30 per cent, and that may reach 40 per cent if its operating performance improves

Jefferies analyst Po Wei and Howard Lau raised Nine Dragons net profit forecast next year 23 per cent, to 3 billion yuan after the results.