In line 1H13. Vinda’s 1H13 net profit rose 10% to HK$284m.

Earnings have benefited from a lower tax rate thanks to taxplanning and a sharp increase in other income: HK$30m in1H13 compared with less than HK$1m in 1H12. Withoutthese one-offs, net profit would have been flat to negative.

The results are soft but broadly in line with market expectationswhich have lowered materially over the past few months.

ASP has bottomed (for the near term). Sales grew14.8% YoY driven by 17.6% volume growth and a 2.4%decline in ASP, with the latter weighing on gross margin(down 2.4ppt to 28.9%). Despite persistent pressure fromindustry over-capacity, Vinda’s ASP bottomed out after 1Q13as the company reduced promotions. Management statedthat it does not intend to participate in the current price war,suggesting that ASP decline is likely to slow in 2H13F.

No change to capacity schedule. Vinda is sticking to itscapacity target of 760k tons by end-2013F and 890k tons byend-2014, compared with 540k tons by end-2012 and 620ktons by end-June 2013F. This implies both capacity and salesgrowth will accelerate in 2H13F. One of the consequences ofrapid capacity additions has been surging net gearing, whichreached a new high of 46% as at the end of June 2013 andmay be cause for concern.

Overcapacity still an overhang. We remain cautious onVinda. Promotions are now under control and the outlook forwood pulp costs appears stable but industry over-capacitypersists and is the cause of margin downside in the mediumterm. We have seen no sign of the overcapacity issue goingaway as the industry leaders, including Vinda itself, are stillrapidly increasing capacity in a slower market. We reiterateour Neutral rating and revise our target price from HK$11.20to HK$7.50 based on 13x FY14/F P/E.

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