Lee & Man Paper （LMP） reported weak 1H 2019 results, which were in line with aprofit warning released last month.
During the results presentation, LMP management highlighted that market demandwas weak in 1H 2019, but it expected a better 2H, the traditional peak season.
The Company is seeking opportunities overseas to diversify its geographical reach. Atthis stage, overseas markets offer higher profitability than the Chinese market.
The trade war is the major reason for weak downstream demand.
There is still uncertainty about the outlook for LMP, but the valuation doesn’t lookexpensive, and we maintain our ADD rating with a lower target price of HK$5.11（about 7x 2019E PER）。
1H 2019 results highlights
LMP’s turnover decreased by 20.9% YoY to HK$12.95bn in 1H 2019, down fromHK$16.37bn in 1H 2018. Net profit dropped by 43.6% YoY, from HK$3.0bn in 1H 2018 toHK$1.7bn in 1H 2019. The Company’s results were in in line with profit warning issuedlast month. Packaging paper reported a YoY turnover decline of 24.5%, and tissue paperreported flat YoY turnover growth in 1H 2019. Sales volume was 2.8m tonnes in 1H2019, including 2.5m tonnes of packaging paper and 302,000 tonnes of tissue paper.
Packaging paper remained a major profit contributor, accounting for 85.9% of totalsegment profit in 1H 2019, in line with 86.8% in 2018. LMP declared an interim dividendof HK$0.13 per share vs. HK$0.20 a year ago. LMP’s net profit per tonne forcontainerboard was HK$600 in 1H 2019, down from 785 in 2018 and HK$1,003 in 1H2018. Net profit per tonne for tissue paper was HK$577 per tonne in 1H 2019, down fromHK$1,198 in 2018 and HK$1,072 in 1H 2018.
Weak market demand due to the trade war
Market demand for containerboard fell in 1H 2019 due to trade war-related issues, butmanagement highlighted that 2H 2019 is expected to be better （volume and profitability），since 2H is the high season. However, we don’t expect a very strong marketenvironment, given the current macro environment unless there is a trade agreement. Westill expect there to be a delay in new industry capacity, given weak market demand. Thenegatives, such as RMB weakness, waste paper import quotas, and coal-to-gasconversion, will also impact other paper manufacturers. The major players are expectedto benefit from potential industry consolidation.
Tissue paper remains a growth driver
The performance of LMP’s tissue paper business was weaker in 1H 2019 in terms ofaverage selling prices and profitability. According to management, the Companysacrificed near-term profitability to expand nationwide coverage. LMP will add tissuepaper capacity of 100,000 tonnes in 2019, so total tissue paper capacity will reach895,000 tonnes by the end of 2019. LMP will become one of the major players in thetissue paper industry in terms of capacity.
Concerns about the containerboard paper segment cap share priceperformance
We believe that containerboard prices are unlikely to move significantly and that marketconcerns about the supply/demand situation are unlikely to clear up in the near term. Anincrease in new capacity has been constrained by the import quota for waste paperimposed by the Chinese government. Management is looking for capacity expansionoverseas, but the Company will make an announcement only when the expansion plan isready.