Nine Dragons Paper's H2 net income down 34.8% year-over-year to 848.3M yuan with higher selling and marketing costs, tax expenses, net sales up 0.2% to 12.63B yuan primarily from its paper business

HONG KONG , February 28, 2012 (press release) – FINANCIAL HIGHLIGHTS

Sales increased slightly by 0.2% to approximately RMB12.6 billion.

• Gross profit decreased by 11.7% to approximately RMB2,010.3 million.
• Gross profit margin decreased from 18.0% to approximately 15.9%.
• Profit for the period decreased by 34.8% to approximately RMB848.3 million.
• Basic earnings per share decreased from RMB0.27 to RMB0.18.
• Interim dividend per share of RMB2.0 cents (equivalent to approximately HK2.46 cents).


The board of directors (“Board”) of Nine Dragons Paper (Holdings) Limited (the “Company”) announces the unaudited condensed consolidated results of the Company and its subsidiaries (the “Group” or “ND Paper”) for the six months ended 31 December 2011 (the “Period”), together with the comparative figures for the corresponding period of last year.


Being the largest containerboard manufacturer in Asia, ND Paper primarily produces and sells a broad variety of packaging paperboard products, including linerboard (kraftlinerboard, testlinerboard and white top linerboard), high performance corrugating medium and coated duplex board, as well as produces and sells unbleached kraft pulp and specialty paper. In order to further diversify its product portfolio, the Group began to produce new products such as food grade and pharmaceutical grade white board, coated linerboard and recycled printing and writing paper (including uncoated woodfree paper, copy paper, etc.) since 2011 and these products were widely receptive and welcome by customers after their market launch, and encouraging sales performance was achieved. These will not only satisfy the huge market demand but may also enhance the Group’s profitability in future.

The global economy continued to be volatile last year. Until the beginning of 2012, the overall market was still in very serious turmoil. While the external market was affected by European sovereign debt crisis, the domestic Chinese market was hit by tightened liquidity and had caused tremendous pressure to the operating environment of manufacturing industry. During the Period, although prices of the Group’s main raw materials were seen to have declined, the Group was unable to pass on the high costs as selling prices continued to be kept at low levels, thereby affecting profitability to a certain extent. Facing the above challenges, the Group was still able to maintain its usual balance between sales and production as well as management efficiency at each of its production bases, while working full steam on the optimization of all those paper machines that newly commenced production or completed their upgrading. At the same time, the Group continued its investment on the construction of six new paper machines that are planned to commence production in the next two years according to existing development targets.

The production capacity scale and continuous development of the Group’s four major production bases (Dongguan, Taicang, Chongqing and Tianjin) in the key manufacturing centers in China have accomplished outstanding performance. With the addition of Quanzhou and Shenyang bases that will commence production successively within 2013, the Group will have basically established its overall strategic network in the PRC market to become the world’s only paper manufacturer that is able to cover extensively each of the major packaging paperboard markets all over China. As at 31 December 2011, the Group has secured the land use rights for land plots of 11.87 million sq.m in total.

The Group’s total design production capacity has now reached 11.45 million tpa, including six new paper machines that commenced production and three paper machines that completed their upgrade in last financial year, representing a total design production capacity of 3.33 million tpa. Among these paper machines, seven of them had just commenced production in mid-2011. These new paper machines include PM27 that produces coated duplex board, food grade and pharmaceutical grade white board and PM28 that produces recycled printing and writing paper (including uncoated woodfree paper, copy paper, etc.) in Dongguan base, and PM31 that produces testlinerboard and PM32 that produces kraftlinerboard in Tianjin base. The upgraded paper machines include PM3 that produces coated linerboard in Dongguan base, and PM20 that produces coated linerboard and PM21 that produces recycled printing and writing paper (including uncoated woodfree paper, copy paper, etc.) in Taicang base. The optimization of these seven paper machines ran smoothly during the Period and with the diligent efforts of our management and staff at all levels and the active cooperation of equipment suppliers, their optimization was all completed in January 2012. The production efficiency and stability of these seven paper machines is expected to continue to improve in the next few months, gradually contributing to the Group’s profit.

Business Strategy

With a view to building a brand that would thrive for a century, ND Paper has always endeavoured to meet market demand and support the Group’s development by formulating a flexible strategy, so as to maintain its long-term leadership position in the industry. Starting from FY12, the Group has migrated from a rapid growth phase to a stage of steady development. Striking a balance between production and sales is its primary strategy. Specific business expansion plans are established based on its own financial conditions. At the same time, the Group maintains stringent control on its costs and capital expenditure, and improves the production efficiency of paper machines and the effectiveness of existing equipment (in particular, those new paper machines and upgraded paper machines that commenced production in previous financial year), so as to elevate profitability progressively, while ensuring the capacity expansion projects which were planned to be completed in the coming two years will commence production as scheduled. These projects include six new paper machines. PM34 in Tianjin base is expected to commence production before end of July 2012 which primarily produces coated duplex board, food grade and pharmaceutical grade white board with a design production capacity of 550,000 tpa. PM33 in Chongqing base is expected to commence production before end of December 2012 and also primarily produces coated duplex board, food grade and pharmaceutical grade white board with a design production capacity of 550,000 tpa. In addition, two new paper manufacturing bases will commence production in 2013. They are Quanzhou base, the first phase of which includes PM35 and PM36 which primarily produces kraftlinerboard and testlinerboard respectively with a design production capacity of 350,000 tpa and 300,000 tpa respectively, and Shenyang base which includes PM37 and PM38 primarily producing kraftlinerboard and testlinerboard respectively, each with a design production capacity of 350,000 tpa.

The construction and production commencement of these six new paper machines will further increase the total annual production capacity of the Group. By the end of 2012, it is expected that the total annual production capacity will increase by nearly 10% from the current scale, and by the end of 2013, the Group’s total annual production capacity will increase by over 21% from the current scale, to about 14 million tpa., far exceeding its industry peers in terms of product diversity, market coverage, customer network and all kinds of resources. These will greatly strengthen the long-term competitive advantage of the Group in building up a more enormous and more solid platform for the Group’s sales and profit in the future.

Standardizing the Group’s management systems and driving innovation

The Group General Management Office has played an active role in management. It has further standardized the management systems and coordinated the sharing of resources and experiences among the bases, thereby further strengthening the advantages enabled by the Group’s economies of scale and diversified production capacity.

In line with market development direction and to continually enhance operation efficiency, so as to maintain its leadership position in the industry, the Group promotes innovation in the various aspects of products, technology and management, etc., and further demonstrates such achievements and values through naming system. The Group has hitherto obtained 25 patents, and another 9 patent applications or approval are being processed. During the Period, both Dongguan base and Taicang base continued to obtain the “New and High Tech Enterprise” qualification.

As at 31 December 2011, the Group employed approximately 17,700 full-time staff.

Continuing to place high emphasis on environmental protection

The PRC government’s relevant policy on environmental protection, energy conservation and emission reduction requirements is continued in its “12th 5-Year Program”. The Group has always been adhering to the philosophy of “no environment, no paper-making” and continues to maintain its industry leading position in environmental management. The Group persistently carries out internal environmental protection monitoring and system optimization and integrates concepts of environmental protection and recycling into various aspects including production technologies and ancillary facilities, in order to embed the concept of environmental protection in the minds of its employees as well as its products. The Group has completed the building of an environmental protection information system, achieving real-time monitoring on the operation of the environmental protection facilities in each base, and continues to outperform the parameters required by the government in every key standard. At the same time, the Group has erected a large environmental information online monitoring screen outside its base to reveal in real time the key environmental data to the public, thereby fully reflecting the transparency level that a listed company should demonstrate. In December 2011, the Group was awarded the title of “Environment-Friendly Enterprise in PRC Paper Manufacturing Industry(中國造紙工業環境友好企業)” by China Paper Association.



The Group achieved a revenue of approximately RMB12,634.0 million for the Period, representing a slight increase of approximately 0.2% over the corresponding period last year. The major contributor of the Group’s revenue was still from its paper business which accounted for approximately 99.6% of the total group revenue, with the remaining revenue generated from its pulp business.

The Group’s annual design production capacity of packaging paperboard as at 31 December 2011 (excluding the capacity in the ramp-up stage during the Period) was 9.85 million tpa, comprising 5.45 million tpa of linerboard, 3.45 million tpa of high performance corrugating medium and 0.95 million tpa of coated duplex board. The Group’s sales volume of packaging paperboard products remained stable at approximately 4.0 million tonnes in the Period and the corresponding period last year. The sales volume of linerboard, high performance corrugated medium and coated duplex board for the Period accounted for approximately 55.6%, 33.1% and 11.3% of the paper business respectively.

The sales volume of packaging paper board remained relatively stable, mainly due to the newly introduced PM27 and PM28 in Dongguan, PM31 and PM32 in Tianjin, and 3 paper machines PM3, PM20 and PM21 under enhancement and upgrading process with no contribution of sales volume for the Period. All the 4 new paper machines and 3 upgraded machines have completed their enhancement and completed their optimization period in January 2012.

The majority of the Group’s sales continued to be realized from the domestic market, in particular in the corrugating medium and linerboard sectors. For the six months ended 31 December 2011 and 2010, sales related to domestic consumption represented approximately 87.3% and 85.3% of the Group’s total sales respectively, while the remaining sales are denominated in foreign currencies which primarily represented indirect export made to foreign invested processing enterprises in China.

During the Period, sales to the Group’s top five customers in aggregate accounted for approximately 4.8% (2010: 4.6%) of the total revenue, out of which the single largest customer accounted for approximately 1.5% (2010: 1.2%).

Gross Profit

The gross profit for the Period was approximately RMB2,010.3 million, representing a decrease of approximately 11.7% as compared with the RMB2,275.4 million in the same period last year. The gross profit margin for the Period decreased from 18.0% to approximately 15.9% due to the negative impact of substantial increase in the cost of recovered paper and other raw materials and substantial decrease in average selling prices as compared with those in the same period last year.

Selling and marketing costs

Selling and marketing costs increased by approximately 38.6% from RMB230.0 million in the same period last year to approximately RMB318.7 million in the Period. The increase in the selling and marketing costs was due to more geographical coverage in the Period. As a percentage of the Group’s revenue, the selling and marketing costs increased from 1.8% in the same period last year to approximately 2.5% in the Period.

Administrative expenses

Administrative expenses decreased from RMB367.0 million in the period last year to approximately RMB357.3 million in the Period. As a percentage of group revenue, the administrative expenses decreased from 2.9% in the same period last year to approximately 2.8% in the Period.

Operating Profit

The Group’s operating profit for the Period was RMB1,332.6 million, representing a decrease of RMB425.9 million or 24.2% over the RMB1,758.5 million of the same period last year.

Finance Costs (net)

The finance costs decreased from RMB275.2 million in the same period last year to approximately RMB262.6 million in the Period. The decrease in finance cost was mainly due to the net result of the substantial increase in net foreign exchange gains on financing activities derived by loans denominated in foreign currencies upon appreciation of RMB in the Period and the increase in interest expenses mainly due to the fact that higher effective interest rate under the tightened credit policies in China in the Period, and additional borrowings were raised from RMB19,971.0 million as at 31 December 2010 to approximately RMB29,219.3 million as at 31 December 2011 to fund the expansion of production capacity, and bills discount charges substantially increased from RMB100.5 million in the period last year to approximately RMB156.3 million in the Period.

Income Tax

The Group’s income tax expenses increased from RMB191.5 million in the same period last year to approximately RMB232.7 million. The Group’s effective tax rate increased from 12.8% in the corresponding period last year to approximately 21.5% in the Period.

Net Profit and Net Profit Margin

The profit attributable to the equity holders of the Company for the Period was approximately RMB836.5 million, representing a decrease of approximately 34.0% over the corresponding period last year. Whilst the net profit margin decreased from 10.0% in the corresponding period last year to approximately 6.6% in the Period.

Working Capital

The level of inventory as at 31 December 2011 increased by 30.7% to approximately RMB3,342.0 million from RMB2,557.6 million as at 30 June 2011. Inventories mainly comprised recovered paper, pulp and other raw materials of approximately RMB1,906.4 million and finished goods of approximately RMB1,435.6 million.

The turnover days for raw materials and finished products were approximately 33 days and 24 days respectively during the Period, as compared to 30 days and 22 days in the corresponding period last year.

The trade receivables and bills receivable as at 31 December 2011 were RMB5,211.8 million, increased by approximately 48.8% from RMB3,502.5 million as at 30 June 2011. The turnover days for trade receivables debtors were 29 days, as compared to 30 days in the corresponding period last year. As at 31 December 2011, the trade receivables with age less than 60 days accounted for approximately 98.2% of the total trade receivables.

The trade payables and bills payable increased by approximately 63.9% to RMB3,787.7 million as compared to the corresponding figure as at 30 June 2011. The turnover days for trade creditors were 65 days, compared to 55 days in the corresponding period last year.

Liquidity and Financial Resources

The working capital and long-term investment funding requirements of the Group during the Period was primarily satisfied by the Group’s operating cash flows, issue of short-term commercial paper and medium-term note by the Group’s subsidiaries in the PRC, and bank borrowings.

In terms of the Group’s available financial resources as at 31 December 2011, the Group had bank and cash balances of approximately RMB4,439.0 million (including restricted cash of approximately RMB43.7 million) and total undrawn bank facilities of approximately RMB19,222 million.

As at 31 December 2011, the shareholders’ funds were approximately RMB21,473.6 million, an increase of RMB452.9 million from that as at 30 June 2011.

The Group had outstanding bank borrowings as at 31 December 2011 of approximately RMB29,219.3 million. The short-term and long-term borrowings amounted to approximately RMB5,443.2 million and RMB23,776.1 million respectively, accounting for 18.6% and 81.4% of the total borrowings respectively. As at the end of the Period, about 98.4% of the Group’s debts were on unsecured basis.

The net borrowings to total equity ratio for the Group as at 31 December 2011 increased to approximately 115.4% from 101.7% as at 30 June 2011. The Board will closely monitor the Group’s net debt to total equity ratio and reduce the bank borrowings gradually.

Treasury Policies

The Group has established treasury policies with the objectives of achieving effective control of treasury operations and of lowering cost of funds. Therefore, funding for all its operations and foreign exchange exposure have been centrally reviewed and monitored at the Group level. To manage the Group’s exposure to fluctuations in exchange rates and interest rates on specific transactions and foreign currency borrowings, currency structured instruments and other appropriate financial instruments were used to hedge material exposure.

It is the policy of the Group not to enter into any derivative contracts purely for speculative activities.

The treasury policies followed by the Group aim to:

(a) Minimise interest risk

This is accomplished by loan re-financing and negotiation. The Board will continue to closely monitor the Group’s loan portfolio and compare the loan margin spread under its existing agreements against the current borrowing interest rates under different currencies and new offers from banks.

(b) Minimise currency risk

In view of the current volatile currency market, the Board closely monitors the Group foreign currency borrowings. As at 31 December 2011, total foreign currency borrowings amounted to the equivalent of RMB6,942.6 million and RMB loans amounted to RMB22,276.7 million, representing 23.8% and 76.2% of the Group’s borrowings respectively.

On 16 August 2011, the Company has redeemed all outstanding senior notes which beared interest at the rate of 9.875% per annum in full at a redemption price equal to 100% of the principal amount of approximately USD47.6 million (equivalent to approximately RMB305.9 million), plus the applicable premium of approximately USD7.4 million (equivalent to approximately RMB47.8 million), and accrued and unpaid interest of approximately USD1.4 million (equivalent to approximately RMB8.9 million) to 16 August 2011. The redemption price paid by the Company on 16 August 2011 amounted to approximately USD56.4 million (equivalent to approximately RMB360.2 million).

Capital Expenditures

The Group invested approximately RMB3,179.9 million for the construction of factory buildings, purchase of plant and machinery, and equipment during the Period, as compared to RMB5,155.3 million in the corresponding period last year.

Capital Commitments and Contingencies

The Group made capital expenditure commitments mainly for machinery of approximately RMB1,672.5 million, which were contracted but not provided for in the financial statements as at 31 December 2011. These commitments were mainly related to the construction of PM33-38 for the expansion of the Group’s production capacity and improvement of certain existing production lines for a better cost control and enhancement of their profitability.

As of 31 December 2011, the Group had no material contingent liabilities.


Although high volatility was seen in the global market at the beginning of 2012, the Group believes that, with the progressive loosening of austerity policy, the overall economic environment in the PRC will gradually improve in the coming months and a more obvious recovery in the second half of 2012 is envisaged. After the Chinese New Year in 2012, sales momentum is seen to be turning around. The downward adjustment in bank reserve ratio and the decrease in discount rates of bank acceptance notes may mitigate the operation pressure of small and medium-sized enterprises. In the long run, the consumption demand of a huge domestic population will provide sound growth potential for the Group. Further development in domestic consumption will bring a positive impact on the Group in various aspects such as operation, customer base and sales. The management of the Group and staff at all levels will continue to endeavour to achieve maximizing the returns of its investments as an ultimate goal, so as to requite the support and trust from governments at all levels, shareholders, banks, customers, suppliers, staff and people from various communities that have long been bestowed on the Group.


The unaudited condensed consolidated interim financial information has been reviewed by the Company’s audit committee and the Company’s auditor, PricewaterhouseCoopers, in accordance with Hong Kong Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Hong Kong Institute of Certified Public Accountants.


The Board has declared and approved an interim dividend of RMB2.0 cents (equivalent to approximately HK2.46 cents) per share for the Period, which is expected to be payable to the shareholders by post on or before Wednesday, 30 May 2012. The dividend will be payable to the shareholders whose names appear on the register of members of the Company at the close of business on Thursday, 17 May 2012. The translation of RMB into Hong Kong dollars is made at the exchange rate of HK$1.00 to RMB0.81223 as at 27 February 2012 for illustration purpose only. The actual translation rate for the purpose of dividend payment in Hong Kong dollars will be subject to exchange rate at the remittance date.


The register of members of the Company will be closed from Friday, 18 May 2012 to Monday, 21 May 2012, both dates inclusive, during which period no transfer of shares will be registered. In order to qualify for the interim dividend, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s Hong Kong branch share registrar, Tricor Investor Services Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong for registration not later than 4:30 p.m., on Thursday, 17 May 2012.


Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities for the Period.


The audit committee meets at least four times each year with the purpose of monitoring the integrity of the Group’s financial statements and to consider the nature and scope of internal and external audit. The audit committee, together with the Company’s management has reviewed the accounting principles and practices adopted by the Company and discussed over and reviewed the financial matters, including all significant aspects involving financial, operational and compliance controls.

All members of the audit committee are independent non-executive directors, namely, Dr. Cheng Chi Pang (Chairman), Ms. Tam Wai Chu, Maria, Mr. Chung Shui Ming, Timpson and Mr. Wang Hong Bo.


During the Period, the Group was in compliance with the provisions of the Code on Corporate Governance Practices and, where appropriate, the Code of Best Practice, as set out in Appendix 14 to the Rules Governing the Listing of Securities (the ‘‘Listing Rules’’) on the Stock Exchange.


The Company has adopted the Model Code set out in the Appendix 10 to the Listing Rules as its own code of conduct regarding directors’ securities transactions. Specific enquiries have been made with all directors, who have confirmed that, during the Period, they were in compliance with provisions of the Model Code.


In addition to my gratitude to our management and staff, I would like to express my sincere appreciation to governments of various levels for providing a business-friendly environment that has allowed us to prosper and positively influence the lives of our employees while contributing to the success of our industry. I would also like to thank our shareholders, bankers and business partners for their support and look forward to sharing our continued success.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.