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Lee & Man Paper Strategy Analysis

Going Bananas
Matt Ahearn Chelsea Campbell Philip Chong Andrew Koo Erica Swallow

Agenda
• Industry and Company Overview • Core Problems • Solution: BTT • Benefits of BTT • Implementation • Going Forward

Paper & Pulping Industry
• China: 11.8% growth (2000-2005) • Capital intensive • Scarce raw materials • High pollution
– Water – Air – Solid Waste ⁂ High treating/disposal costs

http://www.frost.com/prod/servlet/market-insight-print.pag?docid=83462501

- http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf

- http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf

- http://www.cintrafor.org/CONFERENCE_TAB/China%20Conf%202006/Flynn%202006.pdf

Lee & Man Paper ( 理文造 紙有限公 司 )
• Founded 1994 • Mission: “To be the leading paper company in China” • 2003: Listed on HKSE Main Board (2314) • Public CFB: Lee family (73.4%) • Market Cap: US $2.2B • Annual Containerboard Production Capacity: 4.25M tons • Containerboard Sales (FY07): 1.672M tons • Pulp Sales (FY07): 102M tons • 57% Sales = Chinese domestic market
- Deutshe Bank “Lee & Man” Target Price Revision - http://www.leemanpaper.com/template/leeman/pdf/brochure.pdf

Threat of Entry (Low) ● High government
regulations ● Low access to distribution

● High capital requirements
for purchase of factories

Supplier Power (High) ● 60% of OCC from North
America ● Quality Differentiation: North America has highest quality fiber ● Scarce OCC materials with growing demand ● OCC is a large component of product price ● High power in pricing

Industry Competitiveness
(High)

Buyer Power (Low) ● Low substitutes ● Low power in pricing ● High concentration ● Brand identity low ● Consolidation of paper
producers due to government regulation

● Strong local competitor: Nine
Dragons ● High growth in Asia

● Low product differentiation ● Low informational complexity ● High switching costs and exit
barriers

Threat of Substitutes (Low) ● Cardboard boxes are the industry standard

Core Problems
Raw Material Prices Environmental Policies Industry Competitiveness

Skyrocketing Raw Material Prices
• Lee & Man’s containerboard product contains 85-90% OCC • Increased demand for OCC has driven prices up • 60% OCC from North America (quality)

Historical OCC Prices
Year
2006 2007 2008 Current Price($/MT) $149 $150 $200 $270

Strict Environmental Policies
• Paper production is one of the most polluting industries • China is the 2nd largest polluter in the world • Chinese government is shutting down small inefficient plants

Industry Competitiveness
• Two Main Chinese Competitors
– Lee & Man – Nine Dragons

• Low Product Differentiation
– Nine Dragons has entered into high-tech containerboard market – How will Lee & Man position themselves?

Papyrus & BTT Technology
• Papyrus Australia Limited
– Founded in 1994 – Sole purpose to develop a new technology to address the growing environmental and regulatory concerns of the paper manufacturing industry – The Papyrus Technology was patented in 2007 both Australia and in 160 other countries

• Papyrus Technology
– Basic overview
- http://www.papyrusaustralia.com.au/aspx/company_history.aspx - http://velocity.ansto.gov.au/velocity/ans0016/article4_print.html

Papyrus Australia Corporate Video

- http://www.papyrusaustralia.com.au/aspx/why_banana_overview.aspx

Benefits of BTT
Stable Supply Environmentally Friendly Product Differentiation Cost Efficient

Location!

United States Department of Agriculture

Banana Production Quantity Per Country (tonnes)
2000 1. India 2. Brazil 3. China 4. Philippines 5. Ecuador 6. Indonesia 7. Costa Rica 8. Mexico 9. Thailand 10. Colombia 11. Burundi * Vietnam 14140000 5663360 5142990 4929570 6477039 3746962 2250000 1863252 1750000 1613000 1513997 1124800 2001 14210000 6176960 5479074 5060782 6077040 4300422 2130000 2027997 1750000 1469642 1548897 1125500 2002 16820000 6422860 5786295 5274826 5528100 4384384 2050000 1885803 1800000 1560953 1602979 1097000 2003 11954300 6800981 6128817 5368977 6453806 4177155 2028000 2026613 1900000 1536266 1600000 1281800 2004 11388000 6583564 6248636 5631250 6132276 4874439 2249209 2361144 1859442 1577397 1556857 1329400 2005 11710300 6703400 6669679 6298225 6118425 5177608 2352618 2250041 1864850 1764501 1538679 1344200 2006 11710300 7088021 7053000 6794564 6118425 5177608 2352618 2196891 1864850 1764501 1538679 1344200

FAOSTAT | © FAO Statistics Division 2008 | 18 April 2008

China’s Average Growth Rate: 5.4% (2000-2006)
- http://faostat.fao.org/site/567/DesktopDefault.aspx?PageID=567 Note: 1 tonne = 1.10231131 short tons

China Has an Over-Supply of Bananas

• Since 1997: Nine Agricultural Zones (to attract investment): • Fujian (2) • Guangdong • Hainan • Heilongjiang • Jiangsu (2) • Shanxi • Shandong • Shanghai • Sichuan (2)
http://atimes.com/atimes/china/hj28ad01.html

Environmentally Friendly
Current waste
“For every 30 kg of banana sold on the market, there are 250 kg of waste” -Ramy Azer
Creator of BTT technology • BTT is currently unutilized •Traditional Paper Making uses 10 tons of water for each ton of paper • Reduce greenhouse gases and eliminates CO2 emission • Only by-product is clean water • Completely Renewable!

Product Differentiation
• Flame retardant • Water resistant • Oil resistant • 300x Stronger

www.abc.net.au/stateline/sa/content/2003/s930379.htm

Increasing Costs
Rising Operating Costs 5000 HKD (Millions) 4000 3000 2000 1000 0 2003 2004 2005 Year 2006 2007

- http://stocks.us.reuters.com/stocks/balanceSheet.asp

Cost Efficient
• Cost savings from product features • Lower insurance costs • Lower OCC cleaning costs • Low capital investment • Lower production costs • Less energy costs
- http://www.truthforce.info/?q=node/view/1506 - http://www.mitra.biz/blog/archives/2006/05/papyrus_wins_12.html

Rain Protection for OCC

Water Treatment Technology

Cost Efficient
• Cost savings from product features • Lower insurance costs • Lower OCC cleaning costs • Low capital investment • Lower production costs • Less energy costs
- http://www.truthforce.info/?q=node/view/1506 - http://www.mitra.biz/blog/archives/2006/05/papyrus_wins_12.html

Implementation Costs
• Implementation Cost Savings = 97% • Production Cost Savings = 80% • Transportation Cost Savings
– 60% of OCC supply from US – 100% of banana supply from local areas

-http://www.papyrusaustralia.com.au

Containerboard Production Costs
OCC

HKD (millions)

Year

Maintain Current Truck Fleet

Flatbed = Industry Standard

BTT Integration Plan
May 2008 • Initiate banana suppliers negotiations • Begin Papyrus licensing process August 2008 • Construct BTT machinery in Guangdong plant • Begin production February 2009 • Select Fullintegration site • Begin negotiations November 2008 • Evaluate BTT with local suppliers technology success • Begin production

May

June

July

Aug

Sept

Oct

Nov

Dec

Jan

Feb

3 Months Goals May - Aug ‘08
• Secure BTT technology license from Papyrus • Cultivate sustainable relationships with banana supplier in Guangdong area

6 Months Goals Aug - Nov ‘08
• Complete technology integration in Guangdong production plant • Begin BTT production and experimental stage

9 Months Goals Nov ‘08 - Feb ‘09
• Evaluate BTT experimental production • Select full integration production site. Begin supplier negotiations, if necessary.

Implementation Period Net Profit

Profit USD (Millions)

Total Total

BTT OCC OCC

10%

20% 30% 40% Year / % BTT Implementation

50%

Moving Forward …

What else can be made from BTT or banana trees?

Banana Bark Textiles

Banana Leaf & Veneer Furniture

Banana Fiber Handicrafts

Recycled Banana Silk Yarn

Banana Ply Clothing & Specialty Paper

Packaging Materials

Core Problems
Raw Material Prices Environmental Policies Industry Competitiveness

Benefits of BTT
Stable Supply Environmentally Friendly Product Differentiation Cost Efficient

Any Questions?