Excerpts:

1.     Event:

The company released earning revision announcement today: Net profit attributable to parent was predicted to fall by 30%-50% compared with the same period of 2007, which was the second substantial revision after that on December 12, 2008.

2.     Our Analysis and Estimation

Loss from inventory depreciation furthest eroded the performance. In the second half of 2008, severe price drop of paper products and raw materials greatly increased inventory impairment provision. The company purchased more wood pulp in mid-2008, which put it at a disadvantage when wood pulp price dramatically slipped later; moreover, operating rate in Q3 & Q4 2008 greatly dropped, which stretched digestion time of raw materials inventory. According to the interim statement, inventory in mid-2008 amounted to Rmb795mn (Rmb580mn for raw material); consumption of Q3-Q4 2008 deducted, raw material inventory at year-end was calculated to be Rmb500-550mn by purchase price; if impairment loss was withdrawn by 25-30%, loss from asset devaluation was estimated to be ~Rmb120-150mn due to inventory depreciation. 

Joint venture deficit caused negative investment income. Influenced by slipped boom of white cardboard, the two joint ventures, IP&SUN and Shandong International suffered loss in Q4 2008. Especially, newly-launched 22# Machine (Shandong International) saw heavy loss from insufficient operating and higher fixed charge. In addition, these two companies also withdrew an inventory depreciation loss of ~Rmb100mn; operational losses and inventory depreciation taken into consideration, their total loss was estimated to exceed Rmb100mn, which would bring a loss of over Rmb50mn to investment income in 2008.

December 2008 would be the worst profiting period. There were mainly three reasons: 1) Finished goods inventory was still in mark-down sale, so product sales kept in the red; 2) Impairment loss was largely withdrawn; 3) Prices of copperplate paper and wood free paper were raised by Rmb100-200/ ton recently, which showed that product prices began to bottom out; with digestion of expensive raw material and withdrawal of impairment loss, product cost continued to decline and gross margin would be boosted.

However, given that sales have not seen obvious rally and sales volume & operating rate are difficult to improve, we hold that performance in January-February 2009 will turn slightly better and see no obvious improvement.

3.     Investment Suggestion