Net profit up 76.1% in 2017, beats expectation
Lee & Man Paper Manufacturing （LMP） announced FY17 results: revenue rose 40.9% to HK$25.84bn; net profit jumped 76.1% toHK$5,040mn or HK$1.11 per share. In 2H17, revenue and net profitincreased a respective 44.4% and 98.7% to HK$14.40bn andHK$2,847mn. 1） Overall net dollar margin was HK$913 in FY17（HK$792 in 1H and HK$1,034 in 2H）。 The metric for containerboardrose from HK$782 in 1H to HK$1,041 in 2H, while the tissueequivalent fell from HK$964 in 1H to HK$944 in 2H. 2） Total salesvolume slipped 1.9% to 5.52mn tonnes in FY17. Containerboardvolume decreased 4.6% to 5.17mn tonnes, while tissue volumesurged 150.5% to 0.352mn tonnes. 3） LMP has 6.03mn tonnes of totaldesigned capacity for containerboard and 0.685mn tonnes for tissue.It is targeting FY18 capex of HK$2.6bn to add 0.11mn tonnes of tissuecapacity in Chongqing （operational May 2018） and 0.5mn tonnes ofnew containerboard capacity in Vietnam （end-2019）。
Trends to watch
Among the key points to watch for with LMP are: 1） its efforts todevelop its containerboard business overseas; 2） its increasing focuson the tissue business; 3） likely upward pressure on domestic OCCprices in FY18; and 4） ASPs, which may rise in the short term but willlikely remain under pressure in the long term.
Earnings forecast
Given a likely rise in containerboard prices in 1H18 and rapid growthof the LMP tissue business, we raise our FY18 net profit forecast44.1% to HK$5,479mn and forecast FY19 net profit of HK$4,632mn.
Valuation and recommendation
The stock is trading at 7.4x 2018e P/E and 1.5x P/B. Reflecting ourforecast revisions and a valuation rollover, we raise our target 46.9%to HK$9.40 （7.8x 2018e P/E and 1.6x P/B）。 As planned capacity islikely to keep weighing on paper prices in 2H18, we maintain HOLD.）
Risks
Jump in new facilities and capacity expansions