Lee & Man Paper's net profit up 4% to HKD674m

But revenue fell 2% to HKD7.2b.

According to Maybank Kim Eng, LMP’s 1HFY3/13 net profit rose 4% YoY to HKD674m, in-line within estimate of HKD672m and 14% above consensus estimates. While sales volumes increased 15% YoY to 2m tons, revenue fell 2% YoY to HKD7.2b, due to the drop in blended ASP to HKD3,535/t (-14% YoY). Net dollar margin fell 7% to HKD336/t from HKD360/t, the lowest since FY3/10.

Here's more from Maybank Kim Eng:

Net dollar margin should improve gradually. We believe that net dollar margin bottomed in 1H and will rebound in 2H to HKD370/t, thanks to an improving product mix and low cost inventories. However, the magnitude of rebound is expected to be small in 2H as the uncertain economic outlook could hinder demand for containerboards. Nonetheless, we project full-year dollar margin to be HKD352/t and HKD382/t in FY3/13F and FY3/14F, down 3% and up 8% respectively.

New Vietnam project. LMP plans to start operations of its PM20 in Vietnam by the end of 2013. PM20 has an annual capacity of 400k tons, accounting for 7% of LMP’s current capacity. The company should benefit from a 1m ton shortage of containerboard in Vietnam at the moment. Management targets to break even three months after operations commence, which is possible in our view, as LMP initiated construction of the Vietnam plant since 2008. Separately, construction of PM18 in Jiangxi is well on-track. We believe that full contribution from the new machines will materialize in 2014. At that time, total capacity will be 6.8m tons, still the second largest in China after Nine Dragons.

Action: Reiterate BUY. Our new TP of HKD4.70 is based on 12x FY3/14F PER. LMP’s business was resilient in 1H as it is still one of the most profitable players in China amid a challenging environment. With a period of heavy CAPEX now over, we are optimistic about LMP’s business outlook in upcoming years, underpinned by a gradual improvement in net dollar margin. LMP is trading at 11x FY3/14F PER, not demanding given that it historically trades at mid-cycle PERs of 9-13x PER.

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