We recently paid a visit to China Paper’s plant and also to one of its key customers, Xinhua’s printing plant in Linyi, Shandong Province.
China Paper has a strong balance sheet and is in a net cash position of S$82mn. This should help fund its plans to double its paper chemical capacity and act on capacity potential acquisition opportunities to expand and enrich its product mix.
With increasing average selling price and recovering utilization rates, we expect China Paper will see record high sales in FY08 and 15-20% YoY growth in net profit. Capacity expansion and M&A opportunities, if completed in 2009 as expected, should further fuel growth in 2009 and onwards.
The stock is currently trading at 2.8x PER of estimated 2008 EPS with even lower forward earnings ratios as earnings are set to grow on firm’s double-digit top line expansion. This is slightly below peers in HK and other S-chips, which are at c.3x-4x PER.
It is also trading well below its book value of S 37 cts per share despite an ROE of 15.7% and even below its net cash of S 20cts per share. As such, valuations are
undemanding but re-rating would depend on delivery of earnings and acquisitions.
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