ASPdeclineseemstohavestabilised
Positivesignal#1–ASPdeclineseemstohavestabilised.AboutaweekafterthepricehikeproposalinlateJuly2014,wecheckedwithseveralpapercompaniesaswellastheirdownstreamcustomers(ie,printingcompanies)andnotethatthepricehikeproposalhashelpedtostabilisethepricedecline,althoughthesuccessrateforimplementingthepricehikesisnothigh,atlessthan10%,basedonourindustrychecks.AccordingtoWIND’sdata,theex-factorypricesforKraftlinerandcorrugatingmediumon11August2014werethesameasaweekback,whiletheex-factorypricesforduplexboardandwhiteboardregisteredaw-wdeclineof0.5%and1.3%,respectively.Thestabilisationofex-factorypricesforKraftlinerandcorrugatingmediumwillhavemoreimpactonLee&Man’s(LMP;2314HK,Buy)andNineDragons’(ND;2689HK,Buy)earningsgiventheirhigherexposuretothesetwoproducts.Wenotethatlinerboardandcorrugatingmediumaccountedfor86%ofsalesrevenueforLMPand73%forNDinFY13.Itmayberecalledthat,on23July2014,NDproposedtoincreaselinerboardandcorrugatingmediumpricesbyCNY50/tonneeffective1August2014.DongguanJinzhouproposedtoreviseuplinerboardandcorrugatingmediumpricesbyCNY50-100/tonneon24July2014.
Positivesignal#2–Morecompanieshaveproposedtoreviseupprices.Wefurthernotethatonemorepapercompanyhasproposedtoreviseuppricesrecently.ZhejiangJianhasproposedtoreviseuptheexfactorypriceoflinerboardbyCNY30-50/tonneon7August2014despitetherelativelylowsuccessrateofimplementingpricehikesreflectedfromotherpapercompaniessofar.Webelievethismayindicatepapercompanies’determinationinincreasingASPsduringthetraditionalpeakseason.WebelievepapercompanieswillfinallybeabletoincreaseASPsinthelaterpartof2H,especiallywiththerecentimprovementofChinaPMIandrecentupwardmovementofinternationalOldCorrugatedContainer(OCC).
Positivesignal#3–Cashmarginspreadsawy-yincrease.Linerboard’scashmarginspreadregistereday-yincreaseinAugust2014,forthefirsttimesinceJuly2012;weconsiderthisasanotherpositivesignalforthesector’smargintoimprovegoingforward.
Pricehikein2H14islikely
Wemaintainourviewthatthepricedeclinein1H14willstabilisein2H14andwearestilllookingforASPhikesofuptoCNY50/tonnein2H14vs.1H14.Wenotethatmostofthepapercompanies(includingLMPandND)wetalkedtoremainpositiveabout2HASPsandexpectASPsin2Htobehigherthanin1Hduetoseasonalityandgradualimprovementofdemand.Shareprices’positivecatalystsmayinclude:1)higher-than-expectedChinaPMI;and2)confirmationofASPhikesin2H.WemaintainourBuyratingonLMPandND,butstillpreferLMPtoNDforitsstrongerbalancesheet,andlesssensitivitytoexchangeratesandinterestratechanges.