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20 November 2017

Manufacturing

China Containerboard

IndustrialsManufacturing Breaking News

AsiaChina

Industry

ChinaContainerboard

Date20 November 2017

Deutsche BankMarkets Research

Imported OCC contaminants cap cut to0.5%? Further margin squeeze in 2018China intends to revise OCC contaminant threshold to 0.5%According to the Bureau of International Recycling (BIR), on November 15, Chinanotified the WTO that it intends to control the percentage of contaminants inimported OCC to 0.5% with new rules due to be published on December 31,2017 and implementation on March 1, 2018. (See "Environmental ProtectionControl Standard for Imported Solid Wastes as Raw Materials - Waste and Scrapof Paper or Paperboard (GB 16487.4 - 2017".) The contaminants percentage forimported OCC is currently 1.5%, based on Chinese regulations published in 2005,but was revised to 0.3% in the initial draft released in August 2017; however,such stringent requirements generated many protests globally. The protests ledto speculation that China would revise the percentage to 1%, but this appears tohave indeed just been speculation. If there are no further changes to the 0.5%standard, which differs a lot from what is currently followed by global recyclingcommunities, this could lead to a significant cost push to Chinese paper producerssince they will be forced to use more expensive higher imported OCC grades.While a cost push normally suggests higher domestic paper prices, China alreadyboasts the most expensive paper prices globally, so further prices hikes shouldnot be expected. On the contrary, this creates an opportunity for more finishedpaper imports into China in 2018.

Imported OCC prices structurally higher for Chinese millsWhile the OCC contaminants threshold has yet to be determined, we knowthat imported OCC will need to be of a higher quality going forward, becausethe import of “unsorted waste paper” will also be banned, starting January 1,2018. Based on Chinese standards, the benchmark US#11 OCC contains 1%contaminants and, according to DB's US paper analyst, many US recyclers aregetting away with a 1.5% contaminant level for waste paper being shipped toChina currently. In order to comply with the new standard of 0.5%, considerablesums will need to be invested so that assets can be upgraded accordingly. If the0.5% contaminant level sticks, Chinese paper mills will be forced to import themore expensive US#12 waste paper, which fits the 0.5% standard and which isUSD15-40/t more expensive. Even excluding the contaminant factor, we estimate8mt, or 28% of imported OCC, will have to be upgraded or rearranged basedon 2017 numbers, including 6.1mt of unsorted waste paper and 1.9mt sorted bypaper mills with capacity of less than 300k.

Paper mills' margins to be squeezed further next yearIn 2H17, large paper mills in China enjoyed an unprecedented advantage, giventhe surprise import ban since May 2017 and the subsequent crash in US OCC.

Johnson Wan

Research Analyst

+852-2203 6163

Top picks

Nine Dragons Paper(2689.HK),HKD12.80

Sell

Lee & Man Paper (2314.HK),HKD8.86 HoldSource: Deutsche Bank

Companies featured

Nine Dragons Paper (2689.HK),HKD12.80 Sell

2017A 2018E 2019E

P/E (x) 6.6 6.9 11.3

EV/EBITDA (x) 6.2 6.0 7.8

Price/book (x) 1.4 1.4 1.4

Lee & Man Paper (2314.HK),HKD8.86 Hold

2016A 2017E 2018E

P/E (x) 8.9 7.2 9.1

EV/EBITDA (x) 8.5 6.6 7.7

Price/book (x) 1.6 1.9 1.7Source: Deutsche Bank

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.

Distributed on: 20/11/2017 15:00:15 GMT

0bed7b6cf11c

20 November 2017

Manufacturing


Small mills, which were only able to use domestic OCC, suffered while large millsbenefited. However, we believe this advantage will go away in 2018. Since thetrough in September 2017, imported US OCC #11 has rebounded from USD160/t to USD260/t and costs could become greater for large mills if they are forcedto use more expensive, higher-quality imports. While the argument is that higherOCC prices will lead to higher paper prices, we do not believe that will be the casein 2018. A sustainable Chinese paper price should be capped by imports, whichare still c.RMB1,500t more expensive than they are overseas at the moment. Withmore new containerboard supply becoming available in China this and next year,supply-demand for global OCC will also tighten, pushing costs higher. Reiteratingour Sell on NDP with a target price of HKD10.98/share and our Hold on LMP witha target price of HKD8.30/share.

Figure 1: Potential changes to Chinese waste paper import rules

Current version, 2005 Consultation version, Nov 2017

Customs

code

47071000 Recovered (waste and scrap) unbleached

kraft paper or paperboard or corrugated medium

47072000 Recovered (waste and scrap) paper or

paperboard made mainly from bleached chemical

pulp


paperboard made mainly from mechanical pulp (like

newspaper, magazines and similar printed matter)

47079000 Others recovered (waste and scrap)

paper or paperboard, incl. unsorted

47071000 Recovered (waste and scrap) unbleached

kraft paper or paperboard or corrugated medium


paperboard made mainly from bleached chemical

pulp


paperboard made mainly from mechanical pulp (like

newspaper, magazines and similar printed matter)

Contaminant

cap1.5% 0.5%

Source: MEP, Deutsche Bank


20 November 2017

Manufacturing


Figure 2: US standard for major OCCs

Name Description Contaminant

cap 2004

Contaminant

cap 2016

PS-1 Residential Mixed Paper A mixture of various qualities of paper 2.0% 2.0%

PS-3 Hard Mixed PaperA clean, sorted mixture of various

qualities of paper

Grade not in

use0.5%

PS-4 Boxboard CuttingsNew cuttings of paperboard used in the

manufacture of boxboard0.5% 0.5%

PS-5 Mill WrappersPaper used as outside wrap for rolls,

bundles, or skids of finished paper0.5% 0.5%

PS-6 Old Newspaper Sorted newspapers and etc 1.0% 2.0%

PS-7Regular News, De-ink

Quality

Sorted, fresh newspapers, not

sunburned; may contain magazines0.0% 1.0%

PS-8Special News, De-ink

Quality

Sorted, fresh newspapers, not

sunburned; free from magazines0.0% 1.0%

PS-9 Over-Issue NewsUnused, overrun newspapers printed on

newsprint, or securely tied in bundles0.0% 0.0%

PS-10 MagazinesCoated magazines, catalogues, and

similar printed materials.1.0% 1.0%

PS-11 Old Corrugated ContainersCorrugated containers having liners

of either test liner or kraft.1.0% 1.0%

PS-12Double-Sorted Old

Corrugated

Double-sorted corrugated containers,

generated from supermarkets and/or

industrial or commercial facilities

0.5% 0.5%

PS-13New Double-Lined Kraft

Corrugated Cuttings

New corrugated cuttings having liners of

either test liner or kraft.0.0% 0.0%

PS-37 Sorted Office Paper Paper, as typically generated by offices 2.0% 1.0%

Source: ISRI,Deutsche Bank

Figure 3: China containerboard price Figure 4: China OCC index - imported vs. domestic(adjusted for fibre content)

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

Ju

l-1

5

Se

p-1

5

Nov-1

5

Jan-1

6

Mar-

16

May-1

6

Jul-

16

Sep-1

6

Nov-1

6

Jan-1

7

Mar-

17

May-1

7

Ju

l-1

7

Se

p-1

7

Nov-1

7

(RMB/t)Corrugated Medium - Jiulong 120g Linerboard - Dilong 120g

Duplex board - Dilong 250g

-1,000

-500

0

500

1,000

1,500

2,000

2,500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Ja

n-1

3

May-1

3

Sep

-13

Jan-1

4

May-1

4

Se

p-1

4

Ja

n-1

5

Ma

y-1

5

Sep

-15

Jan-1

6

Ma

y-1

6

Se

p-1

6

Ja

n-1

7

Ma

y-1

7

Sep

-17

(RMB/t) (RMB/t)Domestic - Imported OCC spread (RHS)

Imported OCC

Domestic OCC

Source: RISI Umpaper, Deutsche Bank Source: RISI Umpaper, Deutsche Bank


20 November 2017

Manufacturing


Figure 5: Imported vs. domestic price (linerboard RMB/t) Figure 6: Imported vs. domestic price (corrugatedmedium RMB/t)

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,8003,0003,2003,4003,6003,8004,0004,2004,4004,6004,8005,0005,2005,4005,6005,8006,000

Sep

-13

No

v-1

3

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-

17

Sep

-17

Import premium/ (discounts): linerboard

Imported linerboard

Domestic linerboard (Dilong 120g, national avg)

RMB/t RMB/t

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

2,6002,8003,0003,2003,4003,6003,8004,0004,2004,4004,6004,8005,0005,2005,4005,6005,8006,000

Sep

-13

No

v-1

3

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Ma

r-1

5

Ma

y-1

5

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Ma

r-1

7

Ma

y-1

7

Jul-

17

Sep

-17

Import premium/ (discounts): corrugating medium

Imported corrugating medium

Domestic corrugating medium (Jiulong 120g, national avg)

RMB/t RMB/t

Source: RISI Umpaper, China Customes, Deutsche Bank Source: RISI Umpaper, China Customes, Deutsche Bank


20 November 2017

Manufacturing


Model updated: 16 November 2017

Running the numbersAsiaChinaManufacturing

Lee & Man PaperReuters: 2314.HK Bloomberg: 2314 HK

HoldPrice (17 Nov 17) HKD 8.86

Target Price HKD 8.30

52 Week range HKD 5.68 - 10.52

Market cap (m) HKDm 40,212 USDm 5,147.3

Company ProfileLee & Man Paper is the second-largest containerboardmanufacturer in China. As of December 2014, its annual capacitystood at 5.23mt. Its paper products are used for packaging a widerange of consumer products, including consumer electronics,cosmetics, and food & beverage products. LMP plans to rollout its PM19 in Vietnam in late 2015 and capacity should reach5.63mt by the end of the year.

Price Performance

Lee & Man Paper HANG SENG INDEX (Rebased)

Jan '16 Jan '17Jul '16 Jul '17

10

2.5

5

7.5

12.5

Margin Trends

EBITDA Margin EBIT Margin

14 15 16 17E 18E 19E101520253035

Growth & Profitibility

Sales growth (LHS) ROE (RHS)

14 15 16 17E 18E 19E

02040

-20

6080

100

5101520253035

Solvency

Net debt/equity (LHS) Net interest cover (RHS)

14 15 16 17E 18E 19E0

25

50

75

100

10

20

30

40

50

Johnson Wan+852 2203 6163 [email protected]

Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E

Financial Summary

DB EPS (HKD) 0.41 0.50 0.63 1.23 0.98 0.49Reported EPS (HKD) 0.41 0.50 0.63 1.23 0.98 0.49DPS (HKD) 0.14 0.18 0.22 0.43 0.34 0.17BVPS (HKD) 3.7 3.8 3.7 4.7 5.3 5.4

Weighted average shares (m) 4,680 4,624 4,570 4,535 4,531 4,531Average market cap (HKDm) 20,792 20,749 25,507 40,212 40,212 40,212Enterprise value (HKDm) 31,619 32,053 37,780 51,385 50,483 51,304

Valuation Metrics

P/E (DB) (x) 10.9 8.9 8.9 7.2 9.1 18.0P/E (Reported) (x) 10.9 8.9 8.9 7.2 9.1 18.0P/BV (x) 1.16 1.15 1.62 1.88 1.68 1.64

FCF Yield (%) 2.5 2.7 1.7 5.1 6.9 1.7Dividend Yield (%) 3.2 4.0 3.9 4.8 3.9 1.9

EV/Sales (x) 1.8 1.8 2.1 2.0 2.0 2.1EV/EBITDA (x) 9.8 8.5 8.5 6.6 7.7 12.9EV/EBIT (x) 13.2 11.1 10.8 7.7 9.4 18.2

Income Statement (HKDm)

Sales revenue 17,099 17,616 18,342 25,740 25,609 24,796Gross profit 3,072 3,578 4,081 7,381 6,212 3,758EBITDA 3,231 3,753 4,439 7,751 6,545 3,980Depreciation 833 871 943 1,072 1,155 1,155Amortisation 0 0 0 0 0 0EBIT 2,399 2,882 3,496 6,679 5,390 2,824Net interest income(expense) -198 -145 -149 -151 -185 -203Associates/affiliates 0 0 0 0 0 0Exceptionals/extraordinaries 9 13 7 7 0 0Other pre-tax income/(expense) 0 0 0 0 0 0Profit before tax 2,209 2,750 3,354 6,535 5,206 2,621Income tax expense 305 418 491 979 781 393Minorities 0 0 0 0 0 0Other post-tax income/(expense) 0 0 0 0 0 0Net profit 1,904 2,332 2,863 5,556 4,425 2,228

DB adjustments (including dilution) 0 0 0 0 0 0DB Net profit 1,904 2,332 2,863 5,556 4,425 2,228

Cash Flow (HKDm)

Cash flow from operations 2,541 3,542 3,922 5,655 5,485 3,396Net Capex -2,031 -2,973 -3,498 -3,601 -2,700 -2,700Free cash flow 510 569 423 2,054 2,785 696Equity raised/(bought back) -111 -411 -199 0 0 0Dividends paid -660 -739 -934 -998 -1,942 -1,549Net inc/(dec) in borrowings 1,871 1,523 -619 1,260 412 -1,471Other investing/financing cash flows -288 -15 -210 44 59 32Net cash flow 1,322 926 -1,539 2,359 1,315 -2,292Change in working capital -256 1,131 875 -922 -35 45

Balance Sheet (HKDm)

Cash and other liquid assets 2,033 2,959 1,274 3,634 4,948 2,656Tangible fixed assets 22,465 23,351 24,684 27,226 28,785 30,343Goodwill/intangible assets 962 1,110 1,035 1,021 1,007 993Associates/investments 2 0 0 0 0 0Other assets 9,276 7,277 7,108 8,971 8,929 8,654Total assets 34,737 34,697 34,101 40,851 43,669 42,647Interest bearing debt 12,861 14,262 13,547 14,807 15,219 13,748Other liabilities 4,399 3,199 3,731 4,671 4,594 4,364Total liabilities 17,260 17,461 17,278 19,478 19,813 18,112Shareholders' equity 17,477 17,236 16,823 21,373 23,856 24,535Minorities 0 0 0 0 0 0Total shareholders' equity 17,477 17,236 16,823 21,373 23,856 24,535Net debt 10,828 11,304 12,273 11,173 10,271 11,092

Key Company Metrics

Sales growth (%) 0.8 3.0 4.1 40.3 -0.5 -3.2DB EPS growth (%) -1.8 23.9 24.2 95.6 -20.3 -49.7EBITDA Margin (%) 18.9 21.3 24.2 30.1 25.6 16.0EBIT Margin (%) 14.0 16.4 19.1 25.9 21.0 11.4Payout ratio (%) 35.1 35.7 35.1 35.0 35.0 35.0ROE (%) 11.3 13.4 16.8 29.1 19.6 9.2Capex/sales (%) 12.0 17.0 19.1 14.0 10.5 10.9Capex/depreciation (x) 2.5 3.4 3.7 3.4 2.3 2.3Net debt/equity (%) 62.0 65.6 73.0 52.3 43.1 45.2Net interest cover (x) 12.1 19.9 23.4 44.1 29.2 13.9

Source: Company data, Deutsche Securities estimates


20 November 2017

Manufacturing


Investment Thesis

Outlook

LMP is venturing into the tissue business, a market that is highly fragmentedand competitive. Even though LMP has an inherent cost advantage through theownership of a 300kt pulp line, its expansion plans have far exceeded that of itsraw material supply. The containerboard business for LMP remains a cash cow,with its higher exposure to South China and better product mix in linerboardbeing an advantage in the current market. They will be less impacted by newcapacity additions versus that of its peer NDP. We rate the shares Hold.

Valuation

We value LMP based on 8.5x FY18 PER, a lower multiple versus the 10xmultiple based on their historical average. LMP is currently trading on 9.2x FY18earnings and 18.3x FY19 earnings. The lower multiple reflects the peak earningsthat is expected in 2018. Our target price of HKD8.30 also reflects 1.5x FY18PB on 19.6% ROE and 1.45x FY19 PB on 9.2% ROE. While the PB multiple for2018 appears low, the PB multiple on FY19 is almost too high since we expectearnings decline to persist over the next few years. Versus its peer NDP, webelieve LMP deserves a higher PB and PE multiple, given higher quality earningsgrowth and less cyclical earnings nature. LMP derives more than 51% of itsearnings from South China where supply-demand and market concentration isbetter, and its product mix, heavily skewed towards linerboard, is also morefavorable.

Risks

Upside risks: accelerated ramp-up & profitability of tissue paper business,deceleration of new supply in the sector, stronger-than-expected demand andpaper prices, unexpected OCC cost cuts. Downside risks are the converse.


20 November 2017

Manufacturing


Model updated: 16 November 2017

Running the numbersAsiaChinaManufacturing

Nine Dragons PaperReuters: 2689.HK Bloomberg: 2689 HK

SellPrice (17 Nov 17) HKD 12.80

Target Price HKD 10.98

52 Week range HKD 6.58 - 16.80

Market cap (m) HKDm 59,728 USDm 7,645.4

Company ProfileNine Dragons Paper is the largest containerboard producer inChina. As of the end of December 2014, NDP's total annualdesigned capacity had reached 13.7mt. Based on the company'scurrent expansion plan, PM2(VN) at the Vietnam base andPM39 at the Shenyang base will be rolled out in 2016 and 2017,respectively. By the end of 2017, the company's total capacity isset to reach 14.4mt.

Price Performance

Nine Dragons Paper HANG SENG INDEX (Rebased)

Jan '16 Jan '17Jul '16 Jul '17

5

10

15

0

20

Margin Trends

EBITDA Margin EBIT Margin

15 16 17 18E 19E 20E10

15

20

25

Growth & Profitibility

Sales growth (LHS) ROE (RHS)

15 16 17 18E 19E 20E-20-10

0102030

0510152025

Solvency

Net debt/equity (LHS) Net interest cover (RHS)

15 16 17 18E 19E 20E0

255075

100125

02.557.51012.5

Johnson Wan+852 2203 6163 [email protected]

Fiscal year end 30-Jun 2015 2016 2017 2018E 2019E 2020E

Financial Summary

DB EPS (CNY) 0.29 0.57 1.03 1.57 0.96 0.75Reported EPS (CNY) 0.30 0.24 0.94 1.57 0.96 0.75DPS (CNY) 0.07 0.13 0.30 0.50 0.31 0.24BVPS (CNY) 5.4 5.6 6.4 7.8 8.3 8.7

Weighted average shares (m) 4,666 4,666 4,670 4,666 4,666 4,666Average market cap (CNYm) 22,673 20,080 31,655 50,718 50,718 50,718Enterprise value (CNYm) 47,564 42,150 54,324 72,120 67,856 73,017

Valuation Metrics

P/E (DB) (x) 16.5 7.6 6.6 6.9 11.3 14.4P/E (Reported) (x) 16.1 17.9 7.2 6.9 11.3 14.4P/BV (x) 1.00 0.88 1.43 1.43 1.35 1.28

FCF Yield (%) 17.0 23.1 nm 3.3 12.3 nmDividend Yield (%) 1.4 3.0 4.4 4.6 2.8 2.2

EV/Sales (x) 1.6 1.3 1.4 1.5 1.5 1.6EV/EBITDA (x) 9.3 6.7 6.2 6.0 7.8 9.2EV/EBIT (x) 14.6 9.7 8.1 7.3 10.7 13.7

Income Statement (CNYm)

Sales revenue 30,093 32,093 39,155 49,720 44,125 46,024Gross profit 4,716 5,861 7,976 10,942 7,621 6,753EBITDA 5,105 6,296 8,770 11,945 8,645 7,943Depreciation 1,838 1,966 2,070 2,130 2,302 2,598Amortisation 0 0 0 0 0 0EBIT 3,266 4,330 6,700 9,814 6,343 5,345Net interest income(expense) -1,386 -1,169 -960 -878 -885 -1,099Associates/affiliates 39 42 116 116 116 116Exceptionals/extraordinaries 35 -1,536 -421 0 0 0Other pre-tax income/(expense) 0 0 0 0 0 0Profit before tax 1,955 1,667 5,435 9,053 5,575 4,362Income tax expense 499 518 1,025 1,708 1,052 823Minorities 45 28 26 43 27 21Other post-tax income/(expense) 0 0 0 0 0 0Net profit 1,412 1,122 4,384 7,302 4,496 3,518

DB adjustments (including dilution) -35 1,536 421 0 0 0DB Net profit 1,376 2,658 4,805 7,302 4,496 3,518

Cash Flow (CNYm)

Cash flow from operations 5,606 6,460 3,513 7,672 11,238 1,094Net Capex -1,741 -1,823 -3,646 -6,000 -5,000 -5,000Free cash flow 3,866 4,638 -133 1,672 6,238 -3,906Equity raised/(bought back) 0 0 0 0 0 0Dividends paid -408 -392 -643 -607 -2,334 -1,437Net inc/(dec) in borrowings -3,584 -1,060 -4,260 2,884 -1,281 -3,866Other investing/financing cash flows -465 417 538 122 272 85Net cash flow -591 3,602 -4,497 4,071 2,897 -9,124Change in working capital 2,059 1,389 -3,671 -2,639 4,374 -5,035

Balance Sheet (CNYm)

Cash and other liquid assets 7,334 11,056 6,497 10,574 13,468 4,345Tangible fixed assets 45,011 44,861 46,415 50,335 53,082 55,531Goodwill/intangible assets 1,731 1,783 1,754 1,704 1,655 1,608Associates/investments 64 66 120 236 352 468Other assets 10,894 9,526 11,381 15,675 10,803 16,154Total assets 65,034 67,292 66,167 78,524 79,359 78,106Interest bearing debt 31,991 32,845 28,949 31,833 30,552 26,686Other liabilities 7,518 8,025 7,133 9,868 9,794 10,305Total liabilities 39,508 40,871 36,082 41,701 40,347 36,991Shareholders' equity 25,227 26,074 29,749 36,444 38,607 40,688Minorities 299 347 336 379 406 427Total shareholders' equity 25,526 26,421 30,085 36,823 39,013 41,115Net debt 24,657 21,789 22,452 21,259 17,085 22,341

Key Company Metrics

Sales growth (%) 4.0 6.6 22.0 27.0 -11.3 4.3DB EPS growth (%) -19.6 93.1 80.3 52.4 -38.4 -21.8EBITDA Margin (%) 17.0 19.6 22.4 24.0 19.6 17.3EBIT Margin (%) 10.9 13.5 17.1 19.7 14.4 11.6Payout ratio (%) 23.1 54.1 32.0 32.0 32.0 32.0ROE (%) 5.7 4.4 15.7 22.1 12.0 8.9Capex/sales (%) 5.9 5.7 9.4 12.1 11.3 10.9Capex/depreciation (x) 1.0 0.9 1.8 2.8 2.2 1.9Net debt/equity (%) 96.6 82.5 74.6 57.7 43.8 54.3Net interest cover (x) 2.4 3.7 7.0 11.2 7.2 4.9

Source: Company data, Deutsche Securities estimates


20 November 2017

Manufacturing


Investment Thesis

Outlook

NDP should achieve record margins in 2017 through a change in sales strategyto produce less and keep supply tight in the market. This strategy may be veryeffective near term but it's unlikely to be sustainable. Smaller mills are gainingshare, imports of paper are rising and record margins are also attracting recordnew investment in 2017-20. As a nationwide player, NDP is sensitive to themarket impact of 18mt new capacity additions between 2018-20E versus ademand of only 48 mt in 2017, including its 2mt planned expansion. Sell

Valuation

We value NDP based on 8.5x CY18 earnings, a lower multiple verus the 10xmultiple based on their historical average. The lower multiple reflects the peakearnings that is expected in 2018. We have also had to create pro-formacalendar 2018 earnings for NDP given that they have a June year end but we feeljust blindly using FY18 would be inaccurate as it would include the abnormallyhigh earnings in CY2H17. Based on our proforma earnings for FY18 and FY19.NDP is currently trading on 10.7x FY18 earnings and 16.2x FY19 earnings. Ourtarget price of HKD10.98 reflects 1.28x proforma CY18 PB on 16% ROE and1.45x proforma CY19 PB on 9% ROE. While the PB multiple for 2018 appearslow, the PB multiple on FY19 is almost too high since we expect earnings declineto persist over the next few years.

Risks

Upside risks: unexpected increase in market share and output volume,deceleration of new supply in the sector, stronger-than-expected demand andpaper prices, unexpected OCC cost cuts.


20 November 2017

Manufacturing


Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklistCompany Ticker Recent price* Disclosure

Lee & Man Paper 2314.HK 8.86 (HKD) 17 Nov 2017 14, 15

Nine Dragons Paper 2689.HK 12.80 (HKD) 17 Nov 2017 14*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg, and other vendors. Otherinformation is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than theprimary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm/db.com/equities under the "Disclosures Lookup" and "Legal"tabs. Investors are strongly encouraged to review this information before investing.

Important Disclosures Required by U.S. RegulatorsDisclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from thiscompany within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time itreceived non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. RegulatorsDisclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of thisresearch, please see the most recently published company report or visit our global disclosure look-up page on our websiteat http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subjectissuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive anycompensation for providing a specific recommendation or view in this report. Johnson Wan


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Historical recommendations and target price. Lee & Man Paper (2314.HK)

(as of 11/17/2017)

Current RecommendationsBuyHoldSellNot RatedSuspended Rating

** Analyst is no longer atDeutsche Bank

Date

Secu

rity

pric

e

1

23

4 5

6

7

Jan '16 May '16 Sep '16 Jan '17 May '17 Sep '170.00

2.50

5.00

7.50

10.00

12.50

1. 03/23/2016 Buy, Target Price Change HKD 6,40 Johnson Wan 5. 04/02/2017 Hold, Target Price Change HKD 6,25 Johnson Wan2. 08/02/2016 Downgraded to Hold, Target Price Change HKD 5,65

Johnson Wan6. 07/11/2017 Hold, Target Price Change HKD 8,06 Johnson Wan

3. 10/10/2016 Downgraded to Sell, Target Price Change HKD 5,65Johnson Wan

7. 11/16/2017 Hold, Target Price Change HKD 8,30 Johnson Wan

4. 11/10/2016 Upgraded to Hold, Target Price Change HKD 5,56Johnson Wan

§§§§$$$$$§§§§§

Historical recommendations and target price. Nine Dragons Paper (2689.HK)

(as of 11/17/2017)

Current RecommendationsBuyHoldSellNot RatedSuspended Rating

** Analyst is no longer atDeutsche Bank

Date

Secu

rity

pric

e

12

34

56

7

8

Jan '16 May '16 Sep '16 Jan '17 May '17 Sep '170.00

5.00

10.00

15.00

20.00

1. 12/03/2015 Buy, Target Price Change HKD 6,69 Johnson Wan 5. 01/23/2017 Hold, Target Price Change HKD 8,24 Johnson Wan2. 03/23/2016 Buy, Target Price Change HKD 7,09 Johnson Wan 6. 04/02/2017 Downgraded to Sell, Target Price Change HKD 6,61

Johnson Wan3. 08/02/2016 Downgraded to Hold, Target Price Change HKD 6,80

Johnson Wan7. 07/11/2017 Sell, Target Price Change HKD 7,00 Johnson Wan

4. 10/10/2016 Hold, Target Price Change HKD 7,00 Johnson Wan 8. 11/16/2017 Sell, Target Price Change HKD 10,98 Johnson Wan§§§§$$$$$§§§§§


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Equity Rating Key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holderreturn (TSR = percentage change in share price from currentprice to projected target price plus pro-jected dividend yield ) ,we recommend that investors buy the stock.Sell: Based on a current 12-month view of total share-holderreturn, we recommend that investors sell the stock.Hold: We take a neutral view on the stock 12-months out and,based on this time horizon, do not recommend either a Buyor Sell.

Newly issued research recommendations and target pricessupersede previously published research.


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Additional Information

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David Folkerts-LandauGroup Chief Economist and Global Head of Research

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Research

Michael SpencerHead of APAC Research

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Equity Research

Dave ClarkHead of APAC

Equity Research

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Equity Derivatives Research

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Spyros MesomerisGlobal Head of Quantitative

and QIS Research

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