What could be behind the rise?
NDP issued a positive profit alert, expecting net profit (excluding FX loss) of >Rmb1917m in 2H16, increasing not less than 45% YoY.
The substantial improvement in earnings is attributable to the historic high sales volume of 7.1mt, +6% YoY, as well as higher GP/t driven by strong price hike more than offsetting the rise of raw material costs.
The expected core profit/t of >Rmb270/t was much higher than our FY estimate of ~Rmb233/t.
Here's more from Jefferies:
What is causing the large increase in earnings? We notice that significant paper price hikes were announced in the last few months, which we believe has more than offset the increase of raw material costs (waste paper & coal price). The paper industry is working on a cost plus model, in our view. NDP was able to pass through the higher cost given its market leading position, and there is usually a 2-3 months lag time with the rise of raw material costs. In addition, NDP achieved historic high sales volume, thanks to the upgrading efforts across its various production base.
Our thoughts: The increase in core profit represents that the structural improvement of the industry remains intact. We believe the supply and demand dynamic will remain healthy in 2017 with limited new capacity coming online and slight demand growth coming from E-commerce. The tight government policy control and continued effort in eliminating backward capacity shall mitigate, if any, impact of new capacity. In our recent industry report, we have highlighted our preference of NDP over LMP due to 1) higher margin upside; 2) potential increase in dividend; 3) valuation discount vs LMP.
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