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Company Report Excerpt
January 14, 2009
1. Event:
The company released earning revision announcement today: Net profit attributable to parent was predictedto fall by 30%-50% compared with the same period of 2007, which was the second substantial revision afterthat on December 12, 2008.
2. Our Analysis and EstimationLoss from inventory depreciation furthest eroded the performance.
In the second half of 2008, severeprice drop of paper products and raw materials greatly increased inventory impairment provision. Thecompany purchased more wood pulp in mid-2008, which put it at a disadvantage when wood pulp pricedramatically slipped later; moreover, operating rate in Q3 & Q4 2008 greatly dropped, which stretcheddigestion time of raw materials inventory. According to the interim statement, inventory in mid-2008amounted to Rmb795mn (Rmb580mn for raw material); consumption of Q3-Q4 2008 deducted, raw materialinventory at year-end was calculated to be Rmb500-550mn by purchase price; if impairment loss waswithdrawn by 25-30%, loss from asset devaluation was estimated to be ~Rmb120-150mn due to inventorydepreciation.
Joint venture deficit caused negative investment income.
Influenced by slipped boom of whitecardboard, 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 andhigher 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 wasestimated 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) Finishedgoods inventory was still in mark-down sale, so product sales kept in the red; 2) Impairment loss was largelywithdrawn; 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 andwithdrawal 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 toimprove, we hold that performance in January-February 2009 will turn slightly better and see no obviousimprovement.
3. Investment Suggestion
We sharply lower earnings forecast in the coming years. 2008-2010E operating revenues are predicted tobe Rmb5.22bn, Rmb5.52bn and Rmb6.15bn. 2008 net profit is down-regulated to Rmb194mn (-49% yoy)
By Ye Yunyan 
Shandong Sun Paper Industry Joint Stock(002078): Earning Sharply Down-revised ---Recommended
 
 Report ExcerptPage 2/3
and EPS is at Rmb0.39. 2009-2010E net profit is Rmb250mn and Rmb297mn, with EPS at Rmb0.50 and
Rmb0.59. We maintain “Recommended” rating for the counter.
 
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