Investment Outlines:
Recently, we did on-site investigation on Shandong Chenming Paper Holdings Limited and learned much about its latest operation and industrial status. Attentions were mainly given to industrial demand, inventory status and cost variation of the company.
As a bellwether of paper industry, the company abounds in products of various categories; its product sales basically reflect condition of the whole industry. In November, each product line continued sluggish status of October; however, due to intensified sales strength, sales volume performed slightly better than the previous month and was basically flat with that of September.
Despite drastic price cut of wood pulp and waste paper in October, costs did not decrease accordingly in October and November due to its large inventories. By the end of November, prophase high-priced inventories were being consumed and raw materials inventory markedly reduced; paper cost per ton is expected to decline.
Influenced by stagnant demand and reduced paper cost per ton, we predict price of paper product will further descend in the coming one or two months, time of the price stabilization depends on consumption condition of the inventory.
We adjust the company’s earning forecast in accordance with research results, and predict its 2008-2010 operating turnover of Rmb16.85bn, Rmb15.82bn and Rmb17.12bn, net profit of Rmb1.476bn, 1.153bn and 1.266bn with diluted EPS at Rmb0.72, Rmb0.56 and Rmb0.61 respectively.
2008-2010 P/E ratios are forecasted at 7.86x, 10.07x and 9.17x. PB is 0.93x if calculated by net profit of Q3 2008, while 2008-2010 PB are 0.78x, 0.74x and 0.69x respectively based on estimated net assets. Considering relatively low estimation, performance decline in future has been fully reacted or even over-reacted, thus we hold “Cautious” rating for the counter.