This
the recommedation for 2689 nine dragon
Use of Proceeds
Net
proceeds from the offer are estimated to be HK$2,934 million.
(Assuming the over-allotment option is not
exercised, and at an issue price of HK$3.125 each, being the midpoint
of the indicative price range)
HK$ million
To fund
capital expenditures on paper machines 1,614
To repay
bank borrowings 1,027
Working
capital and other general corporate purposes 293
Financial Highlights
Year ended 30th June 3 months ended
2003 2004 2005 30th September
2005
RMB million RMB million RMB million RMB million
Sales
2,244.8 2,653.5 4,825.4 1,847.8
Gross
profit 290.5 547.8 760.5 379.6
Operating
profit 203.5 425.6 558.1 353.3
Net profit 110.6 281.4 303.7 242.1
Strengths/Opportunities
�� China’s role as a global manufacturing and export centre has generated a
significant amount of demand for
containerboard products for use as packaging and
shipping materials. China’s containerboard consumption
increased from 13.0 million tonnes in 2002 to 18.2
million tonnes in 2004, or at a CAGR of 18.3%. Despite
significant growth over the past years, China’s per
capita containerboard consumption remains
substantially lower than that of developed
countries.
�� The Group has an established brand name in the
domestic market and is the market leader in terms of
quality, production capacity and market share. As
such, it is generally able to price its domestic sales at a
premium over average domestic prices for most of
its products.
�� The Group’s production capacity, sales and net
profit have achieved a CAGR of 67.3%, 46.6% and 65.7%,
respectively, from FY2003 to FY2005. With a shift
in product mix, better operating efficiency and full results
of consolidated earnings from acquisition in 2005,
the Group’s net profit margin improved to 13.1% (more
than doubled with FY2005 margin at just 6.3%) in
the first 3 months of FY2006 after a decline in FY2005.
�� Priced at 11.4x to 13.6x FY2006E P/E, valuation of
the counter is competitive when compared with its
major rival Lee and Man Paper Manufacturing (stock
code: 2314) of 14.8x forward P/E.
Weaknesses/Threats
× The main raw materials used to produce
containerboard are recovered paper and kraft pulp. Owing to short
supply of such raw materials in China, paper
manufacturers import most of such raw materials and are
therefore exposed to international price
fluctuation.
× The overall paper manufacturing industry in China,
including the containerboard segment, is relatively
fragmented with a large number of manufacturers.
Nonetheless, due to the capital intensity, environmental
sensitivity and constraints on raw material
supplies, there are significant entry barriers to large-scale paper
manufacturing operations.
× The Group is highly leveraged. Its net gearing
ratio stayed about 200% in FY2003 to FY2005. As of 30th
September 2005, the Group’s total bank borrowings
amounted to RMB6,004 million. With the interest rates
staging to rise further, it is inevitably that the
Group’s interest expense is expected to climb further.