china china paper & packaging -...

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our

website www.macquarie.com/disclosures.

CHINA

Key paper & packaging stocks

Ticker Company Price TP Reco Mkt cap HK HK$ HK$ US$ 2689 Nine Dragons 5.12 7.00 OP 3019 2314 Lee & Man 4.43 5.50 OP 2618 1812 Chenming 3.08 3.00 N 1140

Source: Bloomberg, Macquarie Research, June 2013, priced as of 18 June 2013

Valuation

Ticker Company PER EV/EBITDA ROE P/BV

HK CY13 CY13 CY13 2689 Nine Dragons 11.0 7.6 7.8% 0.8 2314 Lee & Man 9.1 5.9 14.9% 1.3 1812 Chenming 13.9 7.5 2.6% 0.4

Source: Bloomberg, Macquarie Research, June 2013, priced as of 18 June 2013

Inside

Nine Dragons Paper 17

Lee & Man Paper 27

Shandong Chenming Paper 37

Analyst(s) Laura Shi +852 3922 3564 [email protected] Matty Zhao +852 3922 1293 [email protected] Andrew Dale +852 3922 3587 [email protected]

19 June 2013 Macquarie Capital Securities Limited

China Paper & Packaging We see fundamental changes We expect net profit per ton (NP/t) to improve for the China Paper and

Packaging sector in the long run with consumption-driven demand and supply

side improvement in raw material and processing capacity. Our top pick is

Nine Dragons based on the recovery story and driven by its high financing

leverage and low historical earnings base.

We transfer Chinese Paper and Packaging sector coverage to Laura Shi with

a positive view and raise our 12-month target prices for:

Nine Dragons price target rises to HK$7.00 ps (from HK$5.00), and

Lee & Man to HK$5.50 ps (from HK$5.00).

Supply / Demand Improvement

Supply side catalysts are: 1) notable obsolete capacity closure; and 2) the

‘Green Fence’ project tightening Recycled Paper (RCP) supply. The

supply side improvement would result in a steeper cost curve in the packaging

sector, and top names would be able to further expand their cost advantage

given better raw material sourcing and advanced capacity techniques.

Meanwhile, we expect a positive outlook for overall packaging demand in the

next 12 months. We expect Chinese retail sales to enjoy a normalised

seasonality effect from 2H13 onward, and overall consumption growth to

outperform GDP in the medium-to-long run.

Target RMB50 NP/t increase in the next 12 months

Though we see short term downside risk for earnings in Jun-Jul, the

supply/demand analysis presents a better sector outlook and indicates a

higher growth rate for linerboard prices than OCC prices given tight raw

material supply and therefore higher pricing power for big packaging plays.

We therefore expect a ~RMB50 YoY increase of NP/t in the next 12 months,

which would represent 31% net margin improvement for Nine Dragons and

13% for Lee & Man. We also raise our assumptions of sustainable long-term

margin per ton for the two names, with Nine Dragons’ rising from RMB200 to

RMB215-220 and Lee & Man’s increasing from HK$450 to HK$500.

Nine Dragons our Top Pick

We prefer Nine Dragons in the China packaging sector, given we expect it to

benefit from the high leverage in the upcycle as well as upside risk on its

financing efficiency. We maintain an OP rating and raise our 12-month TP to

HK$7.00 from HK$5.00, based on 1.1x FY14E P/B which is lower than its

historical average of 1.5x. The target price represents 12x FY14 PE (11x mid-

cycle PE), which is around the historical mid-cycle valuation of 7x-15x but

lower than the 16x-23x before the GFC.

We continue to like Lee & Man as a defensive top paper producer in China

with high operating and financing efficiency. The company has a good track

record of conservative CAPEX and low OCC costs. We maintain our OP

rating and raise our 12-month TP to HK$5.50 from HK$5.00, based on 1.6x

FY13E P/B. We apply a higher range of the historical average P/B multiple

(1.0x – 2.0x) as we expect its ROE to recover to the level seen in 2009-10.

[email protected] Barbara Tong 06/20/13 08:47:24 AM CITIC Bank International {Inv. Relations}

Macquarie Research China Paper & Packaging

19 June 2013 2

Executive Summary

We remain positive on the packaging stocks given

Earnings bottomed out during 2H12 and have enjoyed a rebound since the end of 2012

Higher raw material quality requirements and shutdown of obsolete capacity would increase

market concentration and provide higher pricing power for the top producers

In the long run, Chinese packaging demand is likely to enjoy favourable consumption-

driven growth, as retail sales are likely to outperform GDP growth across China.

SUPPLY – The key driver where we see a positive move

The obsolete capacity closures in the sector reached their highest levels ever in 2012 (with annual

closure figures doubling over 3 years), and we expect the shutdowns to result in improved

supply/demand in the coming years. As big names continue to introduce new capacity to capture

the opportunities arising, we think it is unrealistic to expect the over-capacity issue to be resolved

in the coming 2-3 years, and see the sector continuing with a cost-push model (given utilisation

largely remains at 80-90%). Instead, we expect a higher market concentration by the end of 2015

(with Nine Dragons & Lee & Man’s products accounting for ~50% of the total market share).

Meanwhile, the “Green Fence” project introduced by Chinese Customs earlier this year applies

higher quality requirements to Recycled Paper (RCP) imports and will raise average raw material

costs for medium-to-small plays. Therefore we expect a steeper cost curve in the packaging

sector, and that the expanded cost advantage for the dominant producers would provide further

earnings upside on their margin performance.

DEMAND – To outperform GDP growth

After the consumption-driven muted demand in 3Q12, Paper & Packaging producers in China

enjoyed ~RMB80-100 NP/t rebound in the past 9 months though overall market sentiment for retail

sales has not been particularly robust. We have a positive outlook on the packaging sector in the

next 12 months given that domestic retail sales would likely see a normalised seasonality effect

from 2H13 onward, and overall consumption growth would likely outperform GDP in the medium-

to-long run.

PRICES

Both linerboard and OCC prices softened in 1H13, which nevertheless delivered a good return

during the period (we estimate RMB149 NP/t for Nine Dragons and HK$443 for Lee & Man

between Jan-Jun 2013).

Though we see short term downside risk for earnings in Jun-Jul, the supply/demand analysis

presents a better sector outlook and indicates a higher growth rate for linerboard prices than OCC

prices given:

The “Green Fence” project would tight overall RCP import volume and push up average raw

material costs of packaging operations – especially for medium-to-small names.

Tighter than previous RCP supply in China would not only allow producers to pass on the cost

increase to downstream clients, but also give producers an opportunity to ask for extra

premium.

We therefore expect a ~RMB50 YoY increase in NP/t in the next 12 months, which would

represent 31% net margin improvement for Nine Dragons and 13% for Lee & Man. We also raise

our assumption of sustainable long-term margin per ton for the two names, with Nine Dragons’

rising from RMB200 to RMB215-220 and Lee & Man’s increasing from HK$450 to HK$500.

Key risks to our investment thesis would come from:

Margin pressure will continue to exist in the short term if overall downstream demand in the

peak season does not enjoy a pick up during 3Q-4Q13.

Government easing quality checks on RCP imports (The Green Fence project) and resulting

in increased raw material supply from overseas.



19 June 2013 3

Key Stock Ideas

Our Top pick in the sector is Nine Dragons Paper given its top ranking production capacity,

high leverage, and upside on financing efficiency. Our mid-cycle scenario analysis now applies

RMB215-220/t as the base case for Nine Dragons (vs. our previous assumption of RMB200), and

HK$500/t for Lee & Man (vs. our previous assumption of HK$450). The analysis shows limited

downside risk at current pricing levels for both names, and that Nine Dragons would be the key

beneficiary of the bull case scenario given high leverage and a low earnings base.

Fig 1 Scenario-based share prices vs. current share prices

Source: Bloomberg, Macquarie Research, June 2013

Fig 2 Mid-cycle PER analysis

Nine Dragons (Rmb) Lee & Man (HK$)

Mid-cycle PER Analysis Bear Case Mid cycle Bull Case Bear Case Mid cycle Bull Case

NPAT per ton 110 217 275 340 500 550 2H13-1H14 Tonnes (mt) 11.7 11.7 11.7 5.4 5.4 5.4 NPAT (m) 1287 2539 3218 1836 2700 2970 Number of shares (m) 4665 4665 4665 4705 4705 4705 Rmb EPS 0.28 0.54 0.69 HKD EPS 0.34 0.67 0.85 0.39 0.57 0.63 Applied PER multiple 10 12 11 10 12 11

Target share price (HK$) 3.4 8.0 9.3 3.9 6.9 6.9

Current price (HK$) 5.1 5.1 5.1 4.4 4.4 4.4

Upside -34% 57% 82% -12% 55% 57%

Source: Macquarie Research, June 2013, priced as of 18 June 2013

Our valuation methodology is based on forward P/B multiples given the significant projected

earnings growth (ROE rebound) and the difference in the companies’ financing leverage.

We raise Nine Dragons’ target price to HK$7.00 from HK$5.00, based on 1.1x FY14E P/B

which is lower than its historical average of 1.5x. The target price represents 12x FY14 PE (11x

mid-cycle PE) which is around the historical mid-cycle valuation of 7x-15x, but lower than the 16x-

23x before the GFC. We see the valuation as reasonable, as we expect Nine Dragon’s high

operating leverage to result in a dramatic earnings CAGR during the downstream demand

rebound. We expect its ROE to recover to low double digits by the end of FY15.

We adjust up our Lee & Man earnings forecasts, and raise its TP to HK$5.50 from HK$5.00

given the fundamental improvement in industrial supply/demand as well as structural changes in

Recycled Paper (RCP) supply. The new target price is based on 1.6x FY13E P/B which is heading

into the upper band of the stock’s historical P/B multiples given we expect its ROE performance to

recover to the level seen in 2009-10.

Our new TP reflects 11x FY13 PE (10x mid-cycle PE) which is in the middle of its historical mid-

cycle valuation of 7x-13x. Given the continuous ROE improvement as well as higher earnings

quality, we see 11x as a reasonable multiple for the price target.

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19 June 2013 4

Fig 3 ROE & P/B – Nine Dragons


Fig 4 ROE & P/B – Lee & Man


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19 June 2013 5

Update on recent operations

Price - After pricing bottomed out for both linerboard and OCC in 3QCY12, the Chinese packaging

sector enjoyed a margin recovery during the last few months of 2012, and product prices

stabilised in early 2013.

However, thanks to the low seasonality post CNY as well as the weak market price of Newsprint

(which shares the same raw material with packaging products), OCC import prices have edged

down in recent weeks, and big names like Nine Dragons and Lee & Man have been forced to cut

linerboard selling prices by RMB50-100/t since April.

Fig 5 China Paper prices Fig 6 Paper Margins

Source: Paper.com.cn, Macquarie Research, June 2013 Source: Paper.com.cn, Macquarie Research, June 2013

Despite the weak linerboard prices we still expect favourable operating margins in 1H13 (we

estimate RMB149 NP/t for Nine Dragons and HK$443 or Lee & Man between Jan-Jun 2013) given

the strong market price of Corrugated Medium YTD and low OCC costs.

Meanwhile, the Customs’ quality checks (Green Fence Project) would help limit OCC supply from

overseas, and could result in 1) tighter supply of high-end raw materials, and 2) an expanded cost

advantage for the dominant producers.

Fig 7 China packaging product prices Fig 8 Packaging margins


Volume – YTD linerboard and corrugated box production volumes are up 1-2% YoY, much better

than the 5-10% YoY decrease in 2012. This makes us more confident on a consumption recovery

as well as a better margin outlook on a 12-month view. We expect both Nine Dragons and Lee &

Man’s Jan-Jun 2013 production volume to be largely inline with market expectations and

management guidance,

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Art paper LWCDuplex paper White paperboardNewsprint Paperboard

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The packaging producers saw severe margin squeeze during 4Q08 and 1Q09

Linerboard prices were weak since mid-2012, while OCC prices oscillated significantly over 3Q12. Margins have stabilized since the beginning of 2013.

3200 3400 3600 3800 4000 4200 4400 4600 4800 5000 5200 5400 5600 5800

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Art paper Hardwood pulp prices (RHS)

Paper product prices bottomed out in late 2012, after notable new capacities commenced operation in 2H12.



19 June 2013 6

China’s Operating Green Fence

With an eye on environmental protection, the Chinese government has launched a “Green Fence”

project that has resulted in Chinese Customs Officials assessing US & EU recycled paper bales

more closely starting from March 2013. Any container found with content not meeting certain

standards (especially for the allowance of 1.5% impurity for Mixed Paper) faces being rejected.

The latest industrial update from UMPAPE indicates that with the potential losses from this

rejection, many international RCP (Recycled Paper) traders have stopped offering low grade

Mixed paper and OCC to China, which has resulted in a notable supply increase in the US and

European domestic markets.

Fig 9 China recycled paper import breakdown for 2012

Fig 10 Chinese recycled paper import trend

Source: UMPAPER, Macquarie Research, June 2013 Source: UMPAPER, Macquarie Research, June 2013

Meanwhile, big suppliers with their own sorting plants are now providing clean materials to China

at high processing cost. At the end of May 2013, US OCC prices climbed by US$5/t from the

previous fortnight o US$205-208/t, while low-end RCP #3 CIF prices remained relatively low.

Fig 11 US Sourced CIF prices for Recycled Paper (US$/t)

Source: UMPAPER, Macquarie Research, June 2013

OCC

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#3 #11 #8



19 June 2013 7

We expect the trend to continue during the Peak season in China (largely in 3Q13), and for

supply/demand improvement in both raw material and final goods to be key drivers of margin

performance for the top packaging producers. Catalysts therefore include

New packaging capacity coming online in the US would increase domestic RCP

consumption in the short run. 2013 will be the first year that the US enjoys growth in net

packaging capacity after years of near-zero increases. With ~1mt (1.3% of state capacity) of

processing capacity commencing during May-Aug 2013, we estimate an increase in domestic

consumption in the short run, and therefore potential undersupply in the international market.

Structural changes in Chinese imports. Thanks to the “Green Fence” policy, we expect

structural change in Chinese Recycled Paper imports – with lower volume at the low-end

(mixed paper) and increasing high-end OCC demand filling the gap. This should eventually

raise average RCP import prices and result in higher raw material costs for the Chinese

packaging sector – especially for smaller market players.

With higher RCP import prices as well as stronger demand in the US market, we expect a cost-

driven price hike for downstream products (linerboard and containerboard) in the coming months.

This, together with the high seasonality in 3Q13, would introduce a steeper cost curve in the

market and top producers like Nine Dragons and Lee & Man would likely be the key beneficiaries

of this in our view.



19 June 2013 8

Driver analysis

Demand – moderating recovery continues for the rest of 2013

Given the top Chinese producers have more than 80% sales and capacity exposed to the

domestic market, we see the sector being around 80% domestically driven, and Chinese

consumption therefore as a key driver for the sector.

Fig 12 China Total Retail Sales – YoY (%) – accelerated growth since the beginning of 2013

Fig 13 Retail sales a key driver of Chinese Packaging Sector

Source: Wind, Macquarie Research, June 2013 Source: Wind, Macquarie Research, June 2013

Our Consumer Team believes that weak consumer consumption is behind us, and the market will

see a normalised seasonality effects from 2H13 onward. Our Consumer Analyst Linda Huang

sees income growth and urbanization as long-term tailwinds for consumer staple names in China.

(Please refer to Page 7 of this note for a discussion on urbanization),

Fig 14 Consumption more important now than before for GDP growth

Source: CEIC, Macquarie Research, June 2013

In addition, our Economics Team has highlighted that investment in China is less important now

than before for GDP growth, thanks to the tighter labour market in China. As the demographic

trend is pretty much irreversible, our Economist Chen Shao believes that the newly-gained

strength in income and consumption growth would persist, and as consumption grows faster than

GDP, its share in GDP would naturally rise. (Please refer to Chen Shao’s report China Diviner -

China in 2013: Another year of muddle-through).

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Consumption Investment

Net exports Average of consumption

Average of investment

Contribution to GDP growth%


https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7194760&file_name=WantWantChina080213e140434.pdf&uid=MTgyMjk&

https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7191825&file_name=ChinaDiviner080113e137352.pdf&uid=MTgyMjk&

https://www.macquarieresearch.com/rp/d/r/publication.do?pub_id=7191825&file_name=ChinaDiviner080113e137352.pdf&uid=MTgyMjk&


19 June 2013 9

Given China is planning to boost domestic demand and focus on consumer-led growth, we expect

Chinese containerboard demand to enjoy the same level of growth as private consumption

activity, and therefore outperform GDP growth in the coming 2-3 years. Strong recovery

momentum for consumer consumption during 2H13 would be the start of the accelerating growth.

Fig 15 Chinese Containerboard Demand Outlook

Source: RISI, Macquarie Research, June 2013

1821

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19 June 2013 10

Supply – Net capacity to grow by 7.9% for Containerboard and 2.7% for Printing and

Writing paper in 2013

For packaging products, we expect net containerboard capacity to be up by 5.0mt (or 10%) in

2013, comprising:

New capacity additions of 5.2mt, and

Capacity closures of 0.2mt

For the printing and writing segment, we expect net capacity to grow by 800kt (or 2.7%) in 2013,

comprising:

New capacity additions of 1.8mt and

Capacity closures of 1mt

Fig 16 China Paper & Packaging Supply & Demand model

Million tonnes 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Paper & Packaging Capacity 94 95 112 122 132 140 145 151 % growth 7.3% 0.4% 17.7% 9.3% 8.1% 5.9% 4.0% 3.8% Production 86 93 99 105 113 121 129 134 % growth 7.9% 7.6% 7.1% 5.8% 7.1% 7.5% 6.3% 4.1% Net Imports -1 -1 -2 -2 -3 -4 -4 -4 % growth -314.5% 46.8% 56.7% 9.5% 51.9% 27.8% 5.1% -0.3% Total consumption 85 91 97 103 109 116 123 128 % growth 7.9% 7.1% 6.4% 5.5% 6.0% 6.6% 6.1% 4.2% Utilisation 91.2% 97.8% 88.9% 86.1% 85.3% 86.6% 88.5% 88.8%

Printing and Writing Apparent Cons. 20.4 22.2 23.7 24.3 25.3 26.6 27.8 28.7 Net Imports -1.6 -1.5 -2.0 -2.5 -2.5 -2.5 -2.5 -2.3 Production 22.0 23.7 25.7 26.8 27.9 29.1 30.2 31.0 Yr end capacity 23.0 25.1 27.9 29.3 30.1 30.9 31.8 32.9 Utilisation 95.8% 89.0% 92.1% 91.4% 92.6% 94.1% 95.0% 94.1%

Newsprint Apparent Cons. 4.6 4.2 3.9 4.2 4.2 4.3 4.3 4.2 Net Imports -0.2 -0.1 0.0 0.1 0.1 0.1 0.1 0.1 Production 4.8 4.3 3.9 4.1 4.1 4.2 4.2 4.1 Capacity 4.9 -1.5 4.2 4.3 4.4 4.4 4.4 4.4 Utilisation 98.4% 94.0% 92.0% 93.7% 94.3% 96.2% 96.0% 94.0%

Tissue paper Apparent Cons. 4.2 4.7 5.3 5.6 6.0 6.4 6.8 7.1 Net Imports -0.4 -0.4 -0.4 -0.5 -0.5 -0.6 -0.6 -0.6 Production 4.6 5.1 5.7 6.2 6.6 7.0 7.3 7.8 Capacity 6.0 6.4 6.9 7.9 8.8 9.9 10.6 11.0 Utilisation 76.8% 79.5% 82.8% 78.4% 74.7% 70.2% 69.6% 70.8%

Containerboards Apparent Cons. 35.6 38.3 40.6 43.3 46.5 50.4 54.5 57.5 Net Imports 1.1 0.8 0.9 1.0 0.9 0.9 0.9 0.9 Production 34.5 37.5 39.7 42.3 45.6 49.5 53.6 56.7 Yr end Capacity 37.4 39.9 44.5 49.2 54.2 57.5 59.9 62.6 Utilisation 92.3% 94.0% 89.1% 86.0% 84.1% 86.2% 89.5% 90.5%

Other paper and paperboard Apparent Cons. 20.5 21.9 23.7 25.2 26.6 28.2 29.7 30.6 Net Imports 0.3 0.0 -0.5 -0.2 -1.2 -2.1 -2.3 -2.4 Production 20.2 22.0 24.1 25.4 27.8 30.3 32.0 33.1 Capacity 23.2 25.0 28.1 31.4 34.4 37.0 38.6 39.9 Utilisation 87.1% 88.0% 86.0% 81.0% 80.8% 81.9% 82.8% 82.9%

Total Capacity 94.5 94.8 111.6 122.1 131.9 139.7 145.3 150.7 Total production 86.1 92.7 99.3 105.1 112.5 121.0 128.6 133.9 Total net imports -0.9 -1.3 -2.0 -2.2 -3.3 -4.2 -4.4 -4.4 Total consumption 85.3 91.3 97.2 102.6 108.7 115.9 123.0 128.2 Total utilisation 91.2% 97.8% 88.9% 86.1% 85.3% 86.6% 88.5% 88.8%




19 June 2013 11

Containerboard capacity closures and additions

After 3-years of hard work on obsolete capacity closures, 2013 represents the first year that the

central government has announced a lower target for paper & packaging capacity closures - with

the overall target at 4.55mt (vs. 9.95mt in 2012), of which we expect around 0.2mt to be

containerboard capacity and 1mt printing & writing paper capacity.

As highlighted in the industrial Twelfth Five-Year Plan, the main focus of the closures will be:

Chemical wood pulp production lines with capacity of less than 51ktpa

Non-wood pulp production lines with capacity of less than 34ktpa

OCC production lines with capacity of less than 34ktpa.

Fig 17 Paper & Packaging obsolete capacity closures

Source: MIIT, Macquarie Research, June 2013

Given the previous dramatic gross capacity additions, we see obsolete capacity closures easing

the oversupply issue, and having a positive impact on containerboard market concentration. With

the central government making further moves on RCP imports with higher environmental

protection measures, re-opening of the obsolete capacity would not be an issue for the packaging

sector (unlike for some of the other material sectors) in our view, and more smaller plays may

leave the industry voluntarily with net margins further narrowing.

Fig 18 Estimated Containerboard Capacity Additions & Closures


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19 June 2013 12

Fig 19 Supply demand balance (Overcapacity) for Linerboard


On the other hand, we are not surprised to see medium-to-large size market players planning new

packaging capacity in the coming years. We estimate net new capacity additions in 2013 to reach

5.0mt, with 5.2mt gross additions and 0.2mt closures. Though this represents ~9% of total

containerboard capacity in China, we still see positive moves for market supply/demand compared

with previous years when there were sometimes 6mt-9mt pa of capacity additions.

Fig 20 New capacity additions announced for 2013

Company Location Capacity Date Grade

Shengda Group Jiangsu Shuangdeng Paper Jiangsu 150 2013 Recycled linerboard Fujian Liansheng Paper (Longhai) (PM6) Fujian 350 2013:Q1 Corrugating Medium Jiangxi Lee & Man Paper (PM18) Jiangxi 550 2013:Q1 Kraft Top Liner Baishan Qixiang Paper Jilin 200 2013:Q1 Corrugating Medium Jiangxi Lee & Man Paper (PM19) Jiangxi 350 2013:Q2 Corrugating Medium Anhui Shanying Paper Industrial (PM6) Anhui 550 2013:Q2 Recycled Containerboard Nine Dragons Paper (PM35) Fujian 350 2013:Q2 Kraft Top Liner Nine Dragons Paper (PM36) Fujian 300 2013:Q2 Testliner Anhui Sanying Paper Industrial (PM5) Anhui 490 2013:Q3 Testliner Sichuan F. Source Paper Sichuan 150 2013:Q3 Recycled Containerboard Yuen Foong Yu (PM3) Jiangsu 450 2013:Q4 Recycled Containerboard Long Chen Paper Jiangsu 250 2013:Q4 Testliner Fujian Liansheng Paper (PM8) Fujian 300 2013:Q4 White-top Testliner Nine Dragons Paper (PM39) Sichuan 300 2013:Q4 Corrugating Medium

2013 Total 4740


1.51.2

1.7 1.8 1.5

2.8 2.92.4

4.8

6.9

8.6

7.9

6.35.9

6.6

0

1

2

3

4

5

6

7

8

9

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Mtpa



19 June 2013 13

Prices

Packaging prices have softened since 2Q this year, given 1) unexciting retail sales – which we

believe could be partially attributable to the Avian Flu issue across China, and 2) soft OCC prices

in the domestic and overseas markets. Our downstream channel checks indicate that coming into

April-May, the market saw downstream demand for F&B packing continuing to support sales

orders, while demand from apparel has been relatively weak during the low season.

Headline prices of high-end packaging products like Coated Duplex Board and Coated Ivory

Board have remained low.

Paper prices on the other hand have reached recent highs given support on the cost side.

However we think there is still a long way to go before the sector could enjoy an overall recovery.

Though April-May should be peak season for printing houses, dealers (source: UMPAPER) are

not as optimistic as they were, and see downside risk for headline prices given increasing

inventories.

Margins enjoyed a pick up during 4Q12, and have stabilised since early 2013.

Thanks to strong downstream demand indicated by retail sales in late 2012 – early 2013, average

selling prices of Linerboard were more stable compared with the dramatic move in international

OCC prices during the period. We estimate Jan-Jun 2013 margin performance of the two H-share

names will be largely flat or slightly higher than 2HCY12 with NP/t ~RMB149 for Nine Dragons and

HK$443 for Lee & Man.

It was a similar story for paper products in the past 9 months, however market data shows that

overall demand for paper products remained low post CNY in China, and producers have found it

hard to pass through the cost increase to downstream customers recently.

For 2HCY13, we see earnings upside for packaging products vs. paper products, largely due

to the high seasonality of packaging demand in 3QCY13 as well as the Green Fence Operation by

Chinese Customs. Coming into the peak season, we expect tighter supply of OCC products (raw

material) from overseas while at the same time QoQ improvement in the downstream demand.

However, for paper products, given recent high inventory levels as well as low market sentiment,

we find it is unlikely that paper names will be able to pass on further cost increases to their

downstream users, and see more pressure coming to bear on current headline prices.

Fig 21 Packaging Margins Fig 22 Paper Margins


3200 3400 3600 3800 4000 4200 4400 4600 4800 5000 5200 5400 5600 5800


RMB/t US$/t

2600

3600

4600

5600

6600

7600

8600

9600

10600


Paper product prices bottomed out in late 2012, after notable new capacity commenced operation in 2H12.

0

500

1000

1500

2000

2500

3000

3500

4000

4500


RMB/t US$/t

0

50

100

150

200

250

300

350


The packaging producers saw severe margin squeeze during 4Q08 and 1Q09

Linerboard prices were weak since mid-2012, while OCC prices oscillated significantly over 3Q12. Margins have stabilized since the beginning of 2013.



19 June 2013 14

Valuation analysis

Share prices show higher correlation with OCC prices rather than linerboard prices.

Taking Nine Dragons as an example, back in 2008 Nine Dragons’ share price bottomed 1-month

earlier than physical OCC prices, while recovered months before linerboard prices enjoyed a

rebound.

Nine Dragons has experienced a similar stock performance since 3Q of last year, with the share

price down to a 3-year low together with OCC import prices, and 6 months after the stock

rebounded we find linerboard prices still remain weak.

Fig 23 Nine Dragons Share Px vs. Linerboard & OCC prices


We are positive on both OCC and linerboard prices coming into the peak season, given:

US domestic demand as well as restrictions on RCP import quality would result in tighter supply

of RCP from the global market.

Structural changes in import quality will raise average CIF prices of RCP

Marginal improvement on the demand side coming into the peak season in China, which will

provide higher pricing power for the big packaging plays (that meanwhile are also able to

maintain costs at relatively low levels)

Fig 24 Profit per tonne across the Chinese packaging players


0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

RMB/t

Nine Dragons Lee & Man

RMB 400-450/t used to be normal for the packaging producers , while now we see RMB 300/t as a more reasonable estimate on a 3-year view

0

500

1000 1500

2000

2500

3000 3500

4000

4500

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 0

5

10

15

20

25

30

Linerboard OCC Nine Dragons px

Share px bottomed when linerboard and occ prices were still trending down

Share px already half way through its rally when linerboard px started to increase

Same thing happened in 3Q 2012



19 June 2013 15

We expect the Packaging sector’s average NP/t to normalise at the RMB300/t level during

the next 12-24 months after touching the ~RMB150/t trough level during 3QCY12, reflecting

58% of margin rebound for Nine Dragons and 15% for Lee & Man in the next 2 years.

In the short run, the sector should benefit from high seasonality as well as the quality driven

structural changes in RCP imports during late 2012-early 2013.

In the long run, however, we see catalysts continuing to come from: 1) industrial

supply/demand improvement, 2) continuous quality control at the state level (including “Green

Fence” policy and obsolete capacity closures), and 3) higher production and financing

efficiency.

Fig 25 Historical forward PER for Nine Dragons Fig 26 Historical forward PER for Lee & Man

Source: Factset, Macquarie Research, June 2013 Source: Factset, Macquarie Research, June 2013

Both names have been punished in the past few months given weak OCC prices and muted

demand in China, however we see fundamentally driven earnings upside in the sector, and expect

more potential upside for Nine Dragons, given its high operating leverage and long term target to

lower financing costs.






Current price (HK$) 5.1 5.1 5.1 4.4 4.4 4.4

Upside -34% 57% 82% -12% 55% 57%


In our Mid-cycle PER analysis, we raise our sustainable NP/t assumption from HK$450 to HK$500

for Lee & Man, and from RMB200 to RMB215-220 for Nine Dragons. Both companies have

enjoyed ~RMB80-100 NP/t increases from the trough level in the past 12 months.

We have Nine Dragons as our top pick in the China Paper & Packaging space, thanks to its large

economies of scale and high leverage. The company should continue to enjoy high single digit

capacity growth in the next 2-3 years in our view, and though we expect gradual GP/t

improvement driven by tighter supply/demand in the long run, at the same time the company

would benefit from its efforts in improving financing costs.

0

5

10

15

20

25

30

Jan-08 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12

X

11X

7X

15X

0

2

4

6

8

10

12

14

16

18

20


X

10X

7X

13X



19 June 2013 16

Fig 28 Earning Sensitivity Analysis

1% increase in Nine Dragons Lee & Man Chenming

ASP 12% 6% 38% OCC Price -6% -3% -10% Pulp Price -1% -1% -10% Sales Volume 1% 1% 6%

Source: Macquarie Research, June 2013


Macquarie Research China Pager & Packaging

19 June 2013 17

HONG KONG

2689 HK Outperform

Price (at 08:01, 18 Jun 2013 GMT) HK$5.12

Valuation HK$ 8.96 - DCF (WACC 10.1%, beta 1.5, ERP 7.0%, RFR 4.5%, TGR 3.0%)

12-month target HK$ 7.00

Upside/Downside % +36.7

12-month TSR % +39.2

Volatility Index Very High

GICS sector Materials

Market cap HK$m 23,880

Market cap US$m 3,077

Free float % 33

30-day avg turnover US$m 10.2

Number shares on issue m 4,664

Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E

Revenue m 27,232 33,344 37,660 41,879 EBIT m 3,070 3,556 4,331 5,040 EBIT growth % -2.8 15.8 21.8 16.4 Reported profit m 1,420 1,456 2,093 2,710 Adjusted profit m 1,420 1,456 2,093 2,710 EPS rep Rmb 0.30 0.31 0.45 0.58 EPS rep growth % -28.7 2.5 43.7 29.5 EPS adj Rmb 0.30 0.31 0.45 0.58 EPS adj growth % -28.7 2.5 43.7 29.5 PER rep x 13.3 13.0 9.0 7.0 PER adj x 13.3 13.0 9.0 7.0 Total DPS Rmb 0.07 0.07 0.10 0.13 Total div yield % 1.7 1.7 2.5 3.2 ROA % 5.7 5.8 6.5 7.2 ROE % 6.7 6.6 8.9 10.6 EV/EBITDA x 9.6 8.3 6.9 6.0 Net debt/equity % 100.3 109.7 96.4 81.3 P/BV x 0.9 0.8 0.8 0.7

2689 HK rel HSI performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, June 2013

(all figures in Rmb unless noted)



Nine Dragons Paper A high leverage story Event

As an improving demand/supply balance spurs a recovery in the sector, we

have Nine Dragons as our top pick driven by its high financial leverage and

low historical earnings base.

We transfer coverage of Nine Dragons to Laura Shi with a positive view (maintain

OP rating) and raise our 12-month target price to HK$7.00 ps (from HK$5.00).

Impact

Long-term positive for packaging sector supply/demand. Although we do

not expect a notable slowing of packaging capacity growth in China in coming

years, we see gradual improvement in the sector‟s demand/supply balance in

China thanks to: 1) the positive outlook for retail consumption growth, and 2)

„Green Fence‟ policy to push up raw material prices and accelerate the

closure of obsolete/non-profitable plants.

Nine Dragons the best choice in the sector, in our view, thanks to its high

financial leverage and low historical earnings base. Our sensitivity analysis

shows that a 1% rise in the linerboard market price boosts the bottomline by

6% (vs. 3% for Lee & Man). We thus upgrade our long-term NP/t estimate

(from RMB200 to RMB217) and apply a 36% 3-year earnings CAGR.

Less concern on net gearing. Nine Dragons net gearing has exceeded 100%

in the past two years, thanks to notable capacity expansion as well as poor

downstream demand and margins. Management started to focus on balance

sheet improvement in early 2013, and the latest announcement dated 14 June

2013 highlighted that it will manage any additional capacity spending based on

the new 70-80% net gearing target for FY16. We expect upside from balance

sheet improvement to include: 1) net gearing dropping to 79% within two years,

and 2) effective interest rate dropping to 4.8% p.a. as of FY15.

Earnings and target price revision

We upgrade our TP to HK$7.00 from HK$5.00 despite cutting our earnings for

FY13 by 31% and for FY14 by 9%.

Price catalyst

12-month price target: HK$7.00 based on a Price to Book methodology.

Catalyst: High seasonality in 2H13.

Action and recommendation

Even with a lower earnings estimate, we like the packaging sector and see

higher intrinsic value for Nine Dragons with its improving long-term NP/t. Nine

Dragons is our top pick in the China paper & packaging space, thanks to its

large economic scale and high leverage.

Our new TP of HK$7.00 is based on 1.1x FY14E P/B vs the historical average of 1.5x. The target price represents 12x FY14E PE (11x mid-cycle PE) which is around the historical mid-cycle valuation of 7-15x, but below the 16–23x before the GFC. We see the valuation as reasonable, as Nine Dragon‟s high operating leverage should lead to high earnings CAGRs in a downstream demand rebound. We expect ROE to recover to a low double-digit number by the end of FY15.



19 June 2013 18

Investment view

We maintain our Outperform rating on the name and upgrade our TP to HK$7.00 from HK$5.00.

We think earnings bottomed in 3Q12, and the packaging names will continue to enjoy margin

recovery during 2013-14, thanks to:

Consumption recovery across China

Lower net capacity growth in coming years; and

Quality Control (including Green Fence projects as well as obsolete capacity closure)

Fig 1 Earnings change table

FY13 FY14 FY15

Old New % Chg Old New % Chg Old New % Chg

Sales 31654 33282 5% 35719 37598 5% 40100 41817 4% EBIT 4259 3556 -16% 4554 4331 -5% 5056 5040 0% NPAT 2115 1456 -31% 2296 2093 -9% 2651 2710 2% EPS 0.45 0.31 -31% 0.49 0.45 -9% 0.57 0.58 2% Consensus 1631 2267 Mac vs Cons -11% -8%


We reduce our FY13 earnings estimates to factor in 1) a low earnings base in 1HCY12, and 2) a

lower than expected margin recovery in the past 6 months due to weak demand from Chinese

retailers. However, we expect gradual NP/t recovery in the long run for the Chinese packaging

sector with quality-driven supply/demand improvement, and we assume a higher intrinsic net profit

per ton for both Nine Dragons and Lee & Man.

Our mid-cycle PER analysis applies RMB215-220/t as the base-case sustainable profit per ton for

Nine Dragons (vs. the previous assumption of RMB200), and HK$500/t for Lee & Man (vs. the

previous assumption of HK$450). The bear-case analysis reflects the trough level performance in

3Q12, however we see it unlikely to reoccur given 1) overseas OCC market indicates pricing

upside into 2H13 and 2) we expect to see Chinese consumption join normal seasonality heading

into the peak season. On the other hand, Nine Dragons would be a key beneficiary of the Bull-

Case scenario given its high leverage to the cycle and low earnings base.






Current price (HK$) 5.1 5.1 5.1 4.4 4.4 4.4

Upside -34% 57% 82% -12% 55% 57%


We therefore prefer Nine Dragons in the Chinese paper & packaging space, thanks to its large

economic scale and high leverage. The company should continue to enjoy high single-digit

capacity growth in the next 2-3 years, and though we expect gradual GP/t improvement driven by

tighter supply/demand in the long run, the company should also benefits from its efforts in terms of

financing costs.



19 June 2013 19

Fig 3 Scenario-based share prices vs. current share prices


Fig 4 Earning Sensitivity Analysis




Our new TP of HK$ 7.00 is based on 1.1x FY14E P/B vs the historical average of 1.5x. The target

price represents 12x FY14E PE (11x mid-cycle PE) which is around the historical mid-cycle

valuation of 7-15x, but below 16-23x before GFC. We see the valuation as reasonable, as Nine

Dragon‟s high operating leverage should result in high earnings CAGRs during the downstream

demand rebound. We expect its ROE to recover to a low double-digit number by the end of FY15.

Fig 5 ROE & P/B – Nine Dragons


3.393.90

8.03

6.89

9.33

6.94

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0


HK$


15.1

7.6

12.8

9.9

6.7

9.39.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2008 2009 2010 2011 2012 2013 2014

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

ROE - Nine Dragons P/B (RHS)



19 June 2013 20

Fig 6 Paper names YTD performance Chart Fig 7 Historical forward PER for Nine Dragons

Source: Bloomberg, Macquarie Research, June 2013 Source: Factset, Macquarie Research, June 2013

Fig 8 Profit per tonne in RMB Fig 9 Company ROE

Source: Company data, Macquarie Research, June 2013 Source: Company data, Macquarie Research, June 2013

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Nine Dragons Lee & Man Chenming

-30%

-20%

-10%

0%

10%

20%

30%



0

5

10

15

20

25

30


X

11X

7X

15X

300

187

486

597

435

315333

256

158136

179215

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

25%

18%

28%

21%

15%

12%13%

10%

7% 7%

9%11%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E2015E

Historical Average = 16%



19 June 2013 21

Update on recent operation

Price - After pricing hit bottom for both lineboard and OCC prices in 3Q12, the Chinese packaging

sector enjoyed a substantial margin recovery in the last few months of 2012, and product prices

stabilised in early 2013.

However, thanks to low seasonality post CNY as well as the weak market price for newsprint

(which share the same raw material with packaging products), OCC import prices have edged

down in recent weeks and big names like Nine Dragons and Lee & Man were forced to cut

linerboard selling prices by RMB50-100/t since April.

Fig 10 China paper prices Fig 11 Paper margins

Source: Paper.com.cn, RISI, Macquarie Research, June 2013 Source: Paper.com.cn, RISI, Macquarie Research, June 2013

Despite weak linerboard prices, we still expect a favourable operating margin in 1H13 (we

estimate RMB149 NP/t for Nine Dragons and HK$443 for Lee & Man between Jan-Jun 2013)

given the YTD strong market price of corrugated medium and low OCC cost.

Meanwhile, the Customs‟ quality check (Green Fence Project) would help limit OCC supply from

overseas, and could result in 1) tighter supply on high-end raw material, and 2) expanded cost

advantage for dominant producers.


Source: Paper.com.cn, RISI, Macquarie Research, June 2013 Source: Paper.com.cn, RISI, Macquarie Research, June 2013

Volume – YTD linerboard and corrugated box volume data was up by 1-2% YoY, much better

compared with the 5-10% YoY decrease in 2012. This makes us more confident on the

consumption recovery as well as a better margin outlook on a 12-month view. We expect both

Nine Dragons and Lee & Man‟s Jan-Jun 2013 production volume to be largely inline with market

expectation and management guidance.

2000

3000

4000

5000

6000

7000

8000

9000

10000


RMB/t


3200

3400

3600

3800

4000

4200

4400

4600

4800

5000

5200

5400

5600

5800


RMB/t US$/t

2600

3600

4600

5600

6600

7600

8600

9600

10600


Paper products prices were

bottomed out in late 2012, after

notable new capacities

commenced operation in 2H12.

1000

1500

2000

2500

3000

3500

4000


RMB/t


0

500

1000

1500

2000

2500

3000

3500

4000

4500


RMB/t US$/t

0

50

100

150

200

250

300

350


The packaging

producers had

severe margin

squeeze during

4Q08 and 1Q09

Linerboard prices were weak since

mid-2012, while OCC prices have

oscillated significantly over the 3Q12.

We see margin stablized since the

beginning of 2013.



19 June 2013 22

China’s Green Fence

With an eye for environmental protection, China‟s government started up a so-called “Green

Fence” effort that results in China Customs Officials more closely viewing US & EU recovered

paper bales starting from March 2013. Any container found with content not meeting certain

standard (especially for the allowance of 1.5% impurity for Mixed Paper), faces rejection.

The latest industrial update shows that potential losses that could be incurred by such rejection,

many international RCP (Recycled Paper) traders have stopped offering low grade mixed paper

and OCC to China, and therefore result in a notable supply increase in the domestic market of US

and Europe.

Fig 14 China Recoverred Paper imports breakdown Fig 15 Chinese recovered paper imports trend


Meanwhile, big suppliers with their own sorting plants now are providing clean materials to China

with high processing costs. At the end of May 2013, we have seen US OCC climbed US$5/t from

a fortnight ago to US$205-208/t, while low-end RCP #3‟s CIF prices maintain at relative low level.

Fig 16 US Sourced CIF prices for Recycled Paper (US$/t)


OCC

57%

High-end RCP

3%

ONP/OMG

23%

Mixed Paper

17%

57% 54% 56%

23%21%

22%

17% 22% 19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 Jan-Mar 2013 Apr-13


120

140

160

180

200

220

240

2012-06-20

2012-07-18

2012-08-15

2012-09-12

2012-10-10

2012-11-07

2012-12-05

2013-01-02

2013-01-30

2013-02-27

2013-03-27

2013-04-24

2013-05-22

2013-06-19

US$ per ton

#3 #11 #8



19 June 2013 23

We expect the trend to continue during the Peak season in China (largely in 3Q13), and see

supply/demand improvement on both raw material and final goods the key driver to enlarge

margin performance of top packaging producers. Catalysts therefore include

New packaging capacity coming online in US would increase the domestic RCP

consumption in the short run. 2013 will be the first year for US to enjoy the growth of net

packaging capacity after years of near-silence. With ~1mt (1.3% of state capacity) of

processing capacity being commenced during May-Aug 2013, we estimate an increase of

domestic consumption in the short run, and therefore potential undersupply in the international

market

Structural changes in Chinese import. Thanks to the “Green Fence” policy, we expect to

see a structural change on Chinese Recycled Paper import – with lower volume on the low-

end product (mixed paper) and increasing high-end OCC demand to fill the gap. This,

eventually, will raise the average RCP import prices and result in higher raw material cost for

Chinese packaging sector – especially for small market plays.

With higher OCC import prices as well as stronger demand in US market, we expect a cost-driven

price hike on downstream products (linerboard and containerboard) in the coming months. This,

together with the high seasonality in 2H13, would introduce a steeper cost curve in the market and

top producers like Nine Dragons and Lee & Man will be the key beneficiaries of this.



19 June 2013 24

Share price shows higher correlation with OCC prices rather than linerboard prices.

Taking Nine Dragons as an example, back to 2008 Nine Dragons‟ share price bottomed 1-month

earlier than physical OCC prices, while recovered months before the linerboard prices enjoying

the rebound.

Similar stock performance happened on Nine Dragons since 3Q of last year, with share price

down to 3-year low level together with the OCC import price, and 6 months after the stock

rebounded we find linerboard prices remaining weak.

Fig 17 Nine Dragons Share Px vs. Linerboard & OCC prices

Source: Bloomberg, Macquarie Research, May 2013

We are positive on both OCC price and linerboard prices coming into the peak season,

given

US domestic demand as well as restriction on RCP import quality would result in tighter

supply of RCP from Global market.

Structural changes on import quality will rise the average CIF prices of RCP

Marginal improvement on the demand side coming into the peak season in China, which will

grant higher pricing power in the big packaging plays (who meanwhile are also able to

maintain its cost at relative low levels)

Fig 18 Profit per tonne across the Chinese packaging players

Source: Company Data, Macquarie Research, June 2013

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12

0

5

10

15

20

25

30


Share px bottomed when

linerboard and occ prices

were still trending down

Share px already half way

through its rally when linerboard

px start to increase

Same thing happened in 3Q

2012

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

RMB/t


RMB 400-450/t used to be normalised for the packaging producers ,

while now we see RMB 300/t a more reasonable estimate for a 3-year

view



19 June 2013 25

We expect the packaging sector’s average NP/t to normalise at the RMB300/t level during

the next 12-24 months after touching the ~RMB150/t trough level during 3QCY12, reflecting

58% of margin rebound for Nine Dragons and 15% for Lee & Man in the next 2 years.

In the short run, the sector will be benefit from high seasonality as well as the quality driven

structural changes of RCP imports during late 2012-early 2013.

In the long run, however, we see catalysts continuing to come from 1) industrial

supply/demand improvement, 2) continuous quality control on the state level (including “Green

Fence” policy and obsolete capacity closure), and 3) higher production and financing

efficiency.



Both names have been punished in the past few months given weak OCC prices as well as muted

demand in China, however we see fundamental-driven earnings upside in the sector, and expect

more potential to come from Nine Dragons, given its high operating leverage and long-term target

to lower the financing cost.






Current price (HK$) 5.1 5.1 5.1 4.4 4.4 4.4

Upside -34% 57% 82% -12% 55% 57%


In our mid-cycle PER analysis, we raise the sustainable NP/t assumption from HK$450/t to

HK$500/t for Lee & Man, and from RMB200 to RMB215-220 for Nine Dragons. Both companies

have enjoyed ~RMB80-100 NP/t increase from trough level in the past 12 months.

We have Nine Dragons as our top pick in China Paper & Packaging space, thanks to its large

economic scale and high leverage. The company would continue to enjoy high single digit

capacity growth in the next 2-3 years, and though we expect gradual GP/t improvement driven by

tighter supply/demand in the long run, the company at the same time would benefit from its efforts

on financing cost.

0

5

10

15

20

25

30


X

11X

7X

15X

0

2

4

6

8

10

12

14

16

18

20


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10X

7X

13X



19 June 2013 26

Nine Dragons Paper (2689 HK, Outperform, Target Price: HK$7.00) Interim Results 1H/13A 2H/13E 1H/14E 2H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 14,813 18,531 18,830 18,830 Revenue m 27,232 33,344 37,660 41,879 Gross Profit m 2,439 2,746 3,086 3,086 Gross Profit m 4,400 5,185 6,172 7,087 Cost of Goods Sold m 12,374 15,785 15,744 15,744 Cost of Goods Sold m 22,832 28,159 31,488 34,792 EBITDA m 2,397 2,657 3,027 3,027 EBITDA m 4,373 5,054 6,053 7,020 Depreciation m 747 747 858 858 Depreciation m 1,298 1,493 1,717 1,975 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 2 2 2 2 Other Amortisation m 5 5 5 5 EBIT m 1,648 1,908 2,166 2,166 EBIT m 3,070 3,556 4,331 5,040 Net Interest Income m -781 -819 -760 -760 Net Interest Income m -1,162 -1,600 -1,520 -1,399 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 867 1,089 1,406 1,406 Pre-Tax Profit m 1,908 1,956 2,812 3,641 Tax Expense m -190 -271 -331 -331 Tax Expense m -450 -461 -662 -858 Net Profit m 677 818 1,075 1,075 Net Profit m 1,459 1,495 2,149 2,783 Minority Interests m -19 -21 -28 -28 Minority Interests m -38 -39 -57 -73

Reported Earnings m 658 797 1,046 1,046 Reported Earnings m 1,420 1,456 2,093 2,710 Adjusted Earnings m 658 797 1,046 1,046 Adjusted Earnings m 1,420 1,456 2,093 2,710

EPS (rep) 0.14 0.17 0.22 0.22 EPS (rep) 0.30 0.31 0.45 0.58 EPS (adj) 0.14 0.17 0.22 0.22 EPS (adj) 0.30 0.31 0.45 0.58 EPS Growth yoy (adj) % -21.3 36.6 58.9 31.2 EPS Growth (adj) % -28.7 2.5 43.7 29.5

PE (rep) x 13.3 13.0 9.0 7.0 PE (adj) x 13.3 13.0 9.0 7.0

EBITDA Margin % 16.2 14.3 16.1 16.1 Total DPS 0.07 0.07 0.10 0.13 EBIT Margin % 11.1 10.3 11.5 11.5 Total Div Yield % 1.7 1.7 2.5 3.2 Earnings Split % 45.2 54.8 50.0 50.0 Weighted Average Shares m 4,665 4,665 4,665 4,665 Revenue Growth % 17.3 26.9 27.1 1.6 Period End Shares m 4,665 4,665 4,665 4,665 EBIT Growth % 23.6 9.8 31.4 13.5

Profit and Loss Ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E

Revenue Growth % 11.3 22.4 12.9 11.2 EBITDA m 4,310 4,991 5,991 6,957 EBITDA Growth % 5.8 15.6 19.8 16.0 Tax Paid m -290 -461 -662 -858 EBIT Growth % -2.8 15.8 21.8 16.4 Chgs in Working Cap m -535 -993 -1,033 -2,117 Gross Profit Margin % 16.2 15.6 16.4 16.9 Net Interest Paid m -1,162 -1,600 -1,520 -1,399 EBITDA Margin % 16.1 15.2 16.1 16.8 Other m -151 0 0 0 EBIT Margin % 11.3 10.7 11.5 12.0 Operating Cashflow m 2,171 1,938 2,775 2,583 Net Profit Margin % 5.4 4.5 5.7 6.6 Acquisitions m 0 0 0 0 Payout Ratio % 22.1 22.1 22.1 22.1 Capex m -5,089 -2,548 -1,030 -1,185 EV/EBITDA x 9.6 8.3 6.9 6.0 Asset Sales m 0 0 0 0 EV/EBIT x 13.7 11.8 9.7 8.3 Other m 41 30 30 30

Investing Cashflow m -5,059 -2,518 -1,000 -1,155 Balance Sheet Ratios Dividend (Ordinary) m -436 -315 -322 -463 ROE % 6.7 6.6 8.9 10.6 Equity Raised m 0 0 0 0 ROA % 5.7 5.8 6.5 7.2 Debt Movements m 4,168 226 487 487 ROIC % 5.5 6.2 6.9 7.9 Other m 0 0 0 0 Net Debt/Equity % 100.3 109.7 96.4 81.3 Financing Cashflow m 3,732 -89 165 24 Interest Cover x 2.6 2.2 2.9 3.6 Price/Book x 0.9 0.8 0.8 0.7 Net Chg in Cash/Debt m 823 -669 1,940 1,452 Book Value per Share 4.6 4.9 5.2 5.7

Free Cashflow m -2,918 -610 1,745 1,399

Balance Sheet 2012A 2013E 2014E 2015E Cash m 4,365 4,805 6,745 9,249 Receivables m 5,109 6,137 6,319 6,396 Inventories m 2,849 5,140 5,806 6,458 Investments m 0 0 0 0 Fixed Assets m 45,049 47,916 48,977 50,193 Intangibles m 235 230 230 230 Other Assets m 10 43 43 43 Total Assets m 57,617 64,271 68,121 72,570 Payables m 4,631 9,074 8,890 8,554 Short Term Debt m 5,102 5,204 5,308 5,415 Long Term Debt m 21,192 24,819 25,306 25,793 Provisions m 0 0 0 0 Other Liabilities m 4,818 2,185 3,858 5,803 Total Liabilities m 35,744 41,283 43,362 45,565 Shareholders' Funds m 21,578 22,693 24,463 26,709 Minority Interests m 295 296 296 296 Other m 0 0 0 0 Total S/H Equity m 21,873 22,988 24,759 27,005 Total Liab & S/H Funds m 57,617 64,271 68,121 72,570

All figures in Rmb unless noted. Source: Company data, Macquarie Research, June 2013



19 June 2013 27

HONG KONG

2314 HK Outperform




Upside/Downside % +24.2

12-month TSR % +28.2

Volatility Index High



Market cap US$m 2,611



Investment fundamentals Year end 31 Dec 2012A 2013E 2014E 2015E

Revenue m 15,505 17,792 21,084 22,914 EBIT m 1,997 2,888 3,377 3,679 EBIT growth % nmf 44.6 16.9 8.9 Reported profit m 1,680 2,297 2,730 2,971 Adjusted profit m 1,688 2,307 2,741 2,982 EPS rep ¢ 35.8 48.8 58.0 63.1 EPS rep growth % nmf 36.1 18.8 8.8 EPS adj ¢ 36.0 49.0 58.2 63.3 EPS adj growth % nmf 36.1 18.8 8.8 PER rep x 12.4 9.1 7.6 7.0 PER adj x 12.3 9.0 7.6 7.0 Total DPS ¢ 12.5 17.1 20.3 0.0 Total div yield % 2.8 3.9 4.6 0.0 ROA % 7.2 9.2 9.3 9.6 ROE % 11.6 14.9 15.4 14.4 EV/EBITDA x 11.2 8.3 7.2 6.7 Net debt/equity % 57.7 76.8 60.9 41.4 P/BV x 1.4 1.3 1.1 0.9




(all figures in HKD unless noted)



Lee & Man Paper A defensive choice Event

We continue to like Lee & Man as a defensive play with high operating

efficiency and low financing cost, and see the company as one of the key

beneficiaries of tight raw material supply and obsolete capacity closure.

We transfer coverage of Lee & Man to Laura Shi with a positive view

(maintain OP rating) and raise our 12-month TP to HK$5.50 (from HK$5.00).

Impact

Packaging sector’s supply/demand balance to stabilise long term...

Though we do not expect a notable slowing down of packaging capacity

growth in China for the coming years, we do see gradual improvement in the

sector’s supply/demand balance thanks to 1) the positive outlook on retail

consumption growth and 2) “Green Fence” policy to push upward raw material

prices and accelerate the closure of obsolete/non-profitable plants.

…Therefore better NP per ton performance outlook. Given the quality

restriction on recycled paper (RCP) imports, we expect leading packaging

producers to earn higher pricing power in the market, and therefore we raise

our intrinsic valuation on the names on the back of higher long-term NP/t. We

now assume long-term NP/t to reach HK$500 for Lee & Man (compared with

our previous assumption of HK$450) and estimate it will continue to enjoy

low-to-mid teens volume growth in the next 12-24 months. We expect a 3-

year earnings CAGR of 24% from 2013-2015.

Short-term catalyst – High seasonality in 2HCY13. Heading into 2HCY13,

the packaging sector will enter peak season with 1) lower old corrugated

containers (OCC) supply from US/EU during summer and 2) public holiday

driven demand till the end of the year. We see upside risk to both linerboard

and OCC prices; however with tighter OCC supply, producers would enjoy a

higher margin during the period. We estimate NP/t of HK$500 for 2HCY13

(vs. our HK$443 estimate for 1HCY13).


We raise FY13E & FY14E EPS by 11% and 16% respectively, and upgrade

our TP to HK$5.50 from HK$5.00.

Price catalyst

12-month price target: HK$5.50 based on a Price to Book methodology.

Catalyst: Interim result announcement in August


We raise Lee & Man’s earning forecasts, and raise our TP to H$5.50 from

HK$5.00 given the fundamental improvement in industrial supply/demand as

well as structural changes in RCP supply. The new target price is based on

1.6x FY13E P/B which is heading into the up-cycle P/B multiple as we expect

its ROE to recover to the 2009-10 level.

Our new TP implies 11x FY13 PE (10x mid-cycle PE) which is at the middle of

its historical mid-cycle valuation of 7x-13x. Given the continuous ROE

improvement as well as higher earning quality, we believe 11x is a reasonable

multiple for the price target.



19 June 2013 28

Investment View

We maintain our Outperform rating on Lee & Man and raise our TP to HK$5.50 from HK$5.00.

Though Lee & Man outperformed Nine Dragons by 17% on a 12-month view, we continue to see

pricing upside on this lowest-cost company thanks to the fundamental improvement we forecast in

the packaging sector.

We think sector earnings have touched trough levels in 3Q12, and the packaging names will

continue to enjoy margin recovery during 2013-14, thanks to

Consumption recovery across China;

Lower net capacity growth in the coming years; and

Quality control (including “Green Fence” policy as well as obsolete capacity closure)

Fig 1 Earning Changes Table

FY13 FY14 FY15

HKD m Old New % Chg Old New % Chg Old New % Chg

Sales 18825 17792 -5% 21184 21084 0% 23656 22914 -3% EBIT 2758 2888 5% 3077 3377 10% 3352 3679 10% NPAT 2022 2297 14% 2294 2730 19% 2593 2971 15% EPS 0.44 0.49 11% 0.50 0.58 16% 0.56 0.63 13% Consensus 2059 2524 Mac vs Cons 12% 8%


We roll forward our valuation to CY13-14 after the company changed its financial year-end to

December. We also raise our earning forecasts by 11%-16% for the coming 3 years due to 1)

volume contribution by new capacity addition and 2) quality driven supply/demand improvement in

the long run.

Fig 2 Paper names YTD performance Chart

Fig 3 Historical forward PER for Lee & Man

Source: Bloomberg, Macquarie Research, June 2013 Source: Factset, Macquarie Research, June 2013

Fig 4 Earnings sensitivity analysis




-40%

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19 June 2013 29

We raise our TP to H$5.50 from HK$5.00 given the fundamental improvement in industrial supply/demand as well as structural changes in RCP supply. The new target price is based on 1.6x FY13E P/B which is heading into the up-cycle P/B multiple as we expect its ROE to recover to the 2009-10 level.

Fig 5 ROE & P/B – Lee & Man


Fig 6 Profit per tonne in RMB (calendar year) Fig 7 Company ROE

Source: Company data, Macquarie Research, June 2013 Source: Company data, Macquarie Research, June 2013

Our mid-cycle PER analysis uses RMB215-220/t as the base case for Nine Dragons (vs. previous

assumption of RMB200), and HK$500/t for Lee & Man (vs. the previous assumption of HK$450).

Lee & Man’s NP/t went below the HK$400/t level during 3Q last year, and then rebounded to over

HK$500/t during 4Q12. Lee & Man guided to HK$400-500 NP/ton for FY13, which is fair given

stable margin performance YTD (we expect a NP/t of HK$445 during 1H13 and HK$502 for 2H13)

and the upcoming peak season in 2H13.

13.8

7.0

15.6

13.2

11.6

14.915.4

0

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18

2008 2009 2010 2011 2012 2013 2014

-

1.0

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ROE - Lee & Man P/B (RHS)

416

486

604

521

99

498 509

400

471 484 499

0

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2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

HKD/t

13%

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2013E

2014E

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Average for 2013-2015

is estimated at 15.%

E E



19 June 2013 30

Fig 8 Scenario-based share prices vs. current share price







Current price (HK$) 5.1 5.1 5.1 4.4 4.4 4.4

Upside -34% 57% 82% -12% 55% 57%


However, under our bull case scenario, we see lower earning upside for Lee & Man compared

with Nine Dragons, as Lee & Man has already achieved high operating efficiency and low

financing cost. While for Nine Dragons, we still see potential improvement in its financing cost, and

its high leverage would result in a notable earnings uptrend in the bull case scenario.

3.393.90

8.03

6.89

9.33

6.94

0.0

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HK$




19 June 2013 31


Price - After the bottoming of prices for both lineboard and OCC in 3QCY12, China’s packaging

sector enjoyed a significant margin recovery during the last few months of 2012, and product

prices stabilised in early 2013.

However, thanks to the low seasonality post CNY as well as weak market prices of newsprint



linerboard sales price by RMB50-100/t since April.



Despite weak linerboard prices, we still expect a favourable operating margin in 1H13 (we

estimate RMB149 NP/t for Nine Dragons and HK$443 for Lee & Man between Jan-Jun 2013)

given YTD strong market price of corrugated medium and low OCC cost.

Meanwhile, the Customs’ quality check (“Green Fence” project) would help limit OCC supply from

overseas and could result in 1) tighter supply of high-end raw material and 2) better cost

advantage for dominant local producers.


Source: Paper.com.cn, Macquarie Research, May 2013 Source: Paper.com.cn, Macquarie Research, May 2013

Volume – YTD linerboard and corrugated box volume data were up by 1-2% YoY, much better

compared with the 5-10% YoY decrease in 2012. This makes us more confident on a consumption

recovery as well as better margin outlook on a 12-month view. We expect both Nine Dragons and

Lee & Man’s Jan-Jun 2013 production volume to be largely in line with market expectation and

management guidance.

2000

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The packaging producers saw a severe margin squeeze during 4Q08 and 1Q09

Linerboard prices were weak since mid-2012, while OCC prices have oscillated significantly over 3Q12. Margin stabilized since the beginning of 2013.



19 June 2013 32

China’s operating Green Fence

To protect the environment, China’s government started the “Green Fence” initiative that

mandates Chinese Customs Officials to more closely monitor US & EU recovered paper bales

starting from March 2013. Any container found with content not meeting certain standards

(especially the allowance of 1.5% impurity for mixed paper) faces rejection.

The latest industry update shows that with potential losses from such a rejection, many

international RCP traders have stopped offering low grade mixed paper and OCC to China, and

therefore have resulted in a notable supply increase in the domestic market of US and Europe.

Fig 14 China recovered paper imports breakdown as of 2012

Fig 15 Chinese recovered paper imports trend


Meanwhile, big suppliers with their own sorting plants now are providing clean materials to China

with high processing costs. At the end of May 2013, US OCC prices climbed US$5/t from a

fortnight ago to US$205-208/t, while low-end RCP #3’s CIF prices remained at a relative low level.

Fig 16 US sourced CIF prices for recycled paper (US$/t)


OCC

57%

High-end RCP

3%

ONP/OMG

23%

Mixed Paper

17%

57% 54% 56%

23%21%

22%

17% 22% 19%

0%

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2012 Jan-Mar 2013 Apr-13


120

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240

2012-06-20

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2013-02-27

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2013-06-19

US$ per ton

#3 #11 #8



19 June 2013 33

We expect the trend to continue during the peak season in China (largely in 3Q13), and see

supply/demand improvement in both raw materials and final goods as the key drivers to drive

margin performance of the top packaging producers. Catalysts include:

New packaging capacity coming online in US would increase domestic RCP consumption

in the short run. 2013 will be the first year for the US to enjoy growth in net packaging capacity

after years of no growth. With ~1mt (1.3% of capacity) of processing capacity commencing

from May-Aug 2013, we estimate an increase in domestic consumption in the short run and

therefore potential undersupply in the international market.

Structural changes in Chinese imports. Thanks to the “Green Fence” policy, we expect a

structural change in Chinese recycled paper imports – with lower volume on the low-end

product (mixed paper) and increasing high-end OCC demand to fill the gap. This, eventually,

will raise the average RCP import prices and result in higher raw material cost for the Chinese

packaging sector – especially for small players.

With higher RCP import prices as well as stronger demand in the US market, we expect a cost-

driven price hike in downstream products (linerboard and containerboard) in the coming months.

This, together with the high seasonality in 3Q13, would introduce a steeper cost curve in the

market and top producers like Nine Dragons and Lee & Man should be key beneficiaries.



19 June 2013 34

Share price shows higher correlation with OCC prices than linerboard prices

Taking Nine Dragons as an example, back in 2008, Nine Dragons’ share price bottomed 1 month

before physical OCC prices, while it recovered months before linerboard prices enjoyed a

rebound.

Nine Dragons stock saw a similar performance from 3Q last year, with its share price reaching 3-

year lows in tandem with the OCC import price, and 6 months after the stock rebounded,

linerboard prices still remained weak.

Fig 17 Nine Dragons share px vs. linerboard & OCC prices


We are positive on both OCC and linerboard prices coming into the peak season, given

US domestic demand as well as restriction on RCP import quality would result in tighter

supply of RCP from the global market

Structural changes in import quality will raise average CIF prices of RCP

Marginal improvement on the demand side coming into the peak season in China, which

should lead to higher pricing power for the big packaging plays (who meanwhile are also able

to maintain their cost at relatively low levels)

Fig 18 Profit per tonne across China’s packaging players

Source: Company Data. Macquarie Research, June 2013

0

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Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12

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Share px bottomed when

linerboard and occ prices

were still trending down

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through its rally when linerboard

px start to increase

Same thing happened in 3Q

2012

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2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

RMB/t


RMB 400-450/t used to be a normalised level for the packaging producers , while now we see RMB 300/t as a more reasonable estimate on a 3-year view



19 June 2013 35

We expect the packaging sector’s average NP/t to normalise at RMB300/t during the next

12-24 months after touching the ~RMB150/t trough level during 3QCY12, implying a margin

rebound of 58% for Nine Dragons and 15% for Lee & Man in the next 2 years.

In the short run, the sector should benefit from high seasonality as well as the quality driven

structural changes surrounding RCP imports during late 2012-early 2013.

In the long run, however, we see catalysts continuing to come from 1) industrial

supply/demand improvement, 2) continuous quality control at the state level (including “Green

Fence” policy and obsolete capacity closure), and 3) higher production and low financing cost.



Both names have been punished in the past few months given weak OCC prices as well as muted

demand in China; however we see fundamentals-driven earning upside in the sector and expect

Nine Dragons has more upside potential given its high operating leverage and long term target to

lower the financing cost.






Current price (HK$) 5.1 5.1 5.1 4.4 4.4 4.4

Upside -34% 57% 82% -12% 55% 57%


In our mid-cycle PER analysis, we raise the mid-cycle NP/t assumption from HK$450 to HK$500

for Lee & Man, and from RMB200 to RMB215-220 for Nine Dragons. Both companies have

enjoyed an ~RMB80-100 NP/t increase from trough levels in the past 12 months.

Nine Dragons (2689 HK, HK$5.12, Outperform, TP: HK$7.00) is our top pick in China’s paper &

packaging space thanks to its large economy of scale and high operating leverage. We believe the

company would continue to enjoy high single digit capacity growth in the next 2-3 years, and

though we expect gradual GP/t improvement driven by tighter supply/demand in the long run, the

company should benefit from its efforts to contain financing costs.

0

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19 June 2013 36

Lee & Man Paper Manufacturing (2314 HK, Outperform, Target Price: HK$5.50) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 8,003 8,362 9,430 9,909 Revenue m 15,505 17,792 21,084 22,914 Gross Profit m 1,587 1,830 2,063 2,132 Gross Profit m 2,882 3,893 4,537 4,901 Cost of Goods Sold m 6,416 6,532 7,366 7,777 Cost of Goods Sold m 12,623 13,899 16,547 18,013 EBITDA m 1,459 1,662 1,874 1,872 EBITDA m 2,613 3,535 4,057 4,392 Depreciation m 309 299 337 314 Depreciation m 606 637 668 702 Amortisation of Goodwill m 5 5 6 5 Amortisation of Goodwill m 10 11 11 11 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 1,145 1,358 1,531 1,553 EBIT m 1,997 2,888 3,377 3,679 Net Interest Income m -36 -87 -99 -78 Net Interest Income m -88 -186 -166 -184 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 2 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 1,110 1,270 1,432 1,475 Pre-Tax Profit m 1,911 2,702 3,211 3,495 Tax Expense m -126 -191 -215 -226 Tax Expense m -230 -405 -482 -524 Net Profit m 984 1,080 1,217 1,248 Net Profit m 1,680 2,297 2,730 2,971 Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0

Reported Earnings m 984 1,080 1,217 1,248 Reported Earnings m 1,680 2,297 2,730 2,971 Adjusted Earnings m 989 1,085 1,223 1,253 Adjusted Earnings m 1,688 2,307 2,741 2,982

EPS (rep) ¢ 21.0 22.9 25.9 26.5 EPS (rep) ¢ 35.8 48.8 58.0 63.1 EPS (adj) ¢ 21.1 23.0 26.0 26.6 EPS (adj) ¢ 36.0 49.0 58.2 63.3 EPS Growth yoy (adj) % nmf 54.5 23.1 15.6 EPS Growth (adj) % nmf 36.1 18.8 8.8

PE (rep) x 12.4 9.1 7.6 7.0 PE (adj) x 12.3 9.0 7.6 7.0

EBITDA Margin % 18.2 19.9 19.9 18.9 Total DPS ¢ 12.5 17.1 20.3 0.0 EBIT Margin % 14.3 16.2 16.2 15.7 Total Div Yield % 2.8 3.9 4.6 0.0 Earnings Split % 58.6 47.0 53.0 45.7 Weighted Average Shares m 4,690 4,709 4,709 4,709 Revenue Growth % nmf 11.5 17.8 18.5 Period End Shares m 4,690 4,709 4,709 4,709 EBIT Growth % nmf 59.3 33.7 14.4


Revenue Growth % nmf 14.7 18.5 8.7 EBITDA m 2,206 3,131 3,653 3,988 EBITDA Growth % nmf 35.3 14.7 8.3 Tax Paid m -230 -405 -482 -524 EBIT Growth % nmf 44.6 16.9 8.9 Chgs in Working Cap m 621 -2,186 -1,227 -671 Gross Profit Margin % 18.6 21.9 21.5 21.4 Net Interest Paid m -88 -186 -166 -184 EBITDA Margin % 16.9 19.9 19.2 19.2 Other m -176 0 0 0 EBIT Margin % 12.9 16.2 16.0 16.1 Operating Cashflow m 2,333 354 1,778 2,609 Net Profit Margin % 10.8 12.9 12.9 13.0 Acquisitions m 0 0 0 0 Payout Ratio % 34.8 34.8 34.9 0.0 Capex m -3,000 -1,800 -500 -500 EV/EBITDA x 11.2 8.3 7.2 6.7 Asset Sales m 0 0 0 0 EV/EBIT x 14.6 10.1 8.7 8.0 Other m 1,340 -97 -97 -97

Investing Cashflow m -1,660 -1,897 -597 -597 Balance Sheet Ratios Dividend (Ordinary) m -600 -462 0 0 ROE % 11.6 14.9 15.4 14.4 Equity Raised m 0 0 0 0 ROA % 7.2 9.2 9.3 9.6 Debt Movements m 1,444 2,000 0 -1,500 ROIC % nmf 10.7 9.9 10.1 Other m -1,597 0 0 0 Net Debt/Equity % 57.7 76.8 60.9 41.4 Financing Cashflow m -754 1,538 0 -1,500 Interest Cover x 22.6 15.5 20.4 20.0 Price/Book x 1.4 1.3 1.1 0.9 Net Chg in Cash/Debt m -81 -5 1,181 512 Book Value per Share 3.1 3.5 4.1 4.7

Free Cashflow m -667 -1,446 1,278 2,109

Balance Sheet 2012A 2013E 2014E 2015E Cash m 657 652 1,833 2,345 Receivables m 4,535 6,449 7,025 6,944 Inventories m 2,880 4,383 5,213 5,674 Investments m 0 0 0 0 Fixed Assets m 0 0 0 0 Intangibles m 18,790 20,590 21,090 21,590 Other Assets m 747 2,794 2,848 2,153 Total Assets m 27,609 34,868 38,009 38,706 Payables m 3,309 4,541 4,719 4,429 Short Term Debt m 3,865 3,478 3,130 2,817 Long Term Debt m 5,209 9,789 10,369 8,699 Provisions m 541 541 541 541 Other Liabilities m 87 87 87 87 Total Liabilities m 13,011 18,435 18,846 16,573 Shareholders' Funds m 14,598 16,433 19,163 22,133 Minority Interests m 0 0 0 0 Other m 0 0 0 0 Total S/H Equity m 14,598 16,433 19,163 22,133 Total Liab & S/H Funds m 27,609 34,868 38,009 38,706

All figures in HKD unless noted. Source: Company data, Macquarie Research, June 2013



19 June 2013 37

HONG KONG

1812 HK Neutral




Upside/Downside % -2.6

12-month TSR % -0.5

Volatility Index Medium



Market cap US$m 818

Free float % 65



Investment fundamentals Year end 31 Dec 2012A 2013E 2014E 2015E

Revenue m 19,762 21,740 23,879 25,198 EBIT m 1,147 1,651 2,095 2,215 EBIT growth % -2.2 44.0 26.9 5.7 Reported profit m 221 360 707 831 Adjusted profit m 291 360 707 831 EPS rep Rmb 0.11 0.17 0.34 0.40 EPS rep growth % -63.7 62.7 96.7 17.5 EPS adj Rmb 0.14 0.17 0.34 0.40 EPS adj growth % -55.2 23.5 96.7 17.5 PER rep x 22.7 13.9 7.1 6.0 PER adj x 17.2 13.9 7.1 6.0 Total DPS Rmb 0.02 0.03 0.07 0.08 Total div yield % 0.9 1.4 2.8 3.3 ROA % 2.5 3.5 4.5 4.5 ROE % 2.1 2.6 4.9 5.5 EV/EBITDA x 9.0 7.5 6.5 6.2 Net debt/equity % 129.7 135.2 121.2 106.3 P/BV x 0.4 0.4 0.3 0.3




(all figures in Rmb unless noted)



Shandong Chenming Paper The Worst is Over Event

We transfer coverage of Chenming Paper to Laura Shi with a Neutral rating

(upgrade from UP) and raise our 12-month target price to HK$3.00 ps (from

HK$2.20). We expect a gradual recovery of paper margins in China after

bottoming out in 2Q-3Q2012, but maintain our cautious view on the paper

sector in the long run given the oversupply and fierce price competitiveness

as well as the muted demand outlook.

Impact

1H13 a good period for printing and writing paper - After margins

bottomed out for both packaging and paper products in 3QCY12, we have

seen paper names enjoy a positive move on selling prices during 1H13, due

to high seasonality. High-end products like art paper’s prices have on average

rebounded by RMB200-300/t during Apr-May, and stabilised at RMB5500-

6000/t starting from June.

Although we see downside risk heading into the slack season of the paper

sector, we do not expect what happened in 2H12 to reoccur given the gradual

YoY recovery, as indicated by the overall consumption data. Our NP/t

estimate for FY13 is RMB79 - still far below the historical average of RMB355.

Capacity expansion to bring further earnings upside – After commencing

operation of its 800ktpa art paper plant, 450ktpa writing paper plant and

600ktpa linerboard plant, we have seen significant capacity growth and expect

its total paper and packaging capacity to reach 6000ktpa in 2013. We also

expect capacity expansion will see 1) Chenming reach mid-to-high single digit

volume growth in the coming years, and 2) more favourable earnings growth

(see our more positive sensitivity analysis).


We lower FY13E & FY14E EPS by 60% and 51%, respectively, while we

upgrade our TP to HK$3.00 from HK$2.20.

Price catalyst

12-month price target: HK$3.00 based on a PER methodology.

Catalyst: Demand pick-up of high-end paper products.


We upgrade Chenming to Neutral from Underperform as we think the

worst is over in 2012; and 2013 YTD data reflects a gradual recovery of

the paper sector.

Our new TP of HK$3.00 ps is based on the P/E multiple for our 12-month

forward earning estimate (from 2H13-1H14). We apply 10x forward P/E as the

target multiple – the 5-year average P/E. We think the valuation is reasonable

given 1) the company’s long-term target NP/t (RMB150) is still far below the

historical average of RMB355, and 2) our forecast indicates a 55% 3-year

CAGR of the bottom line.



19 June 2013 38

Investment View

We have made a number of earnings changes to reflect the gradual recovery in the coming 2-3

years after net profit touched its trough level in 2012 – earnings were down 64% YoY in 2012.

We updated our FY12 earnings to reflect a low-base and rolled forward our valuation to FY13.

We raised our earning assumptions for packaging products given the fundamental

improvement seen in sector supply/demand.

We expect to see a much slower improvement in Paper’s margin performance given the long-

term positive view on pulp price but muted demand outlook of paper products.

Fig 1 Earnings Changes Table

RMB m FY13E FY14E

Old New %Chg Old New %Chg

Sales 21763 21740 0% 24577 23879 -3% EBIT 2170 1651 -24% 2923 2095 -28% NPAT 898 360 -60% 1442 707 -51% EPS 0.44 0.17 -60% 0.70 0.34 -51% Consensus 611 778 Mac vs Cons -41% -9%


We upgrade the name to Neutral from Underperform with a new TP of HK$3.00 (from

HK$2.20). The stock has seen a strong price pick-up since the year-end, after the market priced in

an improvement in selective paper and packaging products’ margins. We also raised our long-

term assumption of NP/t from RMB100 to RMB100-150 and therefore think this should be

reflected in a higher target price.

Fig 2 Chenming profit per tonne of paper

Source: Company data, Macquarie Research, June 2013

Our new TP of HK$3.00 ps is based on the P/E multiple for our 12-month forward earning

estimate (from 2H13-1H14). We apply 10x forward P/E as the target multiple – the 5-year average

P/E. We think the valuation is reasonable given 1) the company’s long-term target NP/t (RMB150)

is still far below the historical average of RMB355, while 2) our forecast indicates a 47% 3-year

CAGR of the bottom line.

338

487

582

529

391

270

358

187

5380

143 158

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F

RMB/t



19 June 2013 39


Price - After seeing a pricing bottom for both linerboard and old corrugated containers (OCC)

prices in 3QCY12, the Chinese packaging sector experienced a solid margin recovery over the

last few months of 2012, with product prices stabilising in early 2013.

However, thanks to the low seasonality post CNY as well as weak market prices of newsprint



linerboard sales price by RMB50-100/t since April.


Source: Paper.com.cn, UMPAPER, Macquarie Research, June 2013 Source: Paper.com.cn, UMPAPER, Macquarie Research, June 2013

On the other hand, both pulp and paper prices have risen since the beginning of the year, led by

the strong art paper prices. At the same time, the newsprint and writing paper market stabilised,

with downstream contacts showing normalised seasonality year-to-date.


Source: Paper.com.cn, UMPAPER, Macquarie Research, June 2013 Source: Paper.com.cn, UMPAPER, Macquarie Research, June 2013

Volume – After commencing operation of Chenming’s 800ktpa art paper plant, 450ktpa writing

paper plant, and 600ktpa linerboard plant, we have seen significant capacity growth and expect its

total 2013 paper and packaging capacity to reach 6000ktpa. We expect its total paper, packaging

and pulp sales volume to be up ~9% to 4.5mt in 2013, however, we think long-term volume growth

should be in the mid single digits given the expansion restriction from higher leverage.

2000

3000

4000

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10000


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3200

3400

3600

3800

4000

4200

4400

4600

4800

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5800


RMB/t US$/t

2600

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5600

6600

7600

8600

9600

10600






1000

1500

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3500

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RMB/t


0

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RMB/t US$/t

0

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The packaging

producers had

severe margin

squeeze during

4Q08 and 1Q09

Linerboard prices were weak since

mid-2012, while OCC prices have

oscillated significantly over the 3Q12.

We see margin stablized since the

beginning of 2013.



19 June 2013 40

Fig 7 Earnings sensitivity analysis






19 June 2013 41

Shandong Chenming Paper Holding (1812 HK, Neutral, Target Price: HK$3.00) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 9,798 10,109 11,631 11,104 Revenue m 19,762 21,740 23,879 25,198 Gross Profit m 1,605 1,735 2,031 1,838 Gross Profit m 3,068 3,766 4,423 4,706 Cost of Goods Sold m 8,193 8,374 9,600 9,266 Cost of Goods Sold m 16,694 17,974 19,456 20,493 EBITDA m 1,375 1,494 1,661 1,516 EBITDA m 2,620 3,155 3,630 3,795 Depreciation m 788 699 804 714 Depreciation m 1,473 1,504 1,535 1,580 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 587 795 857 802 EBIT m 1,147 1,651 2,095 2,215 Net Interest Income m -598 -525 -604 -503 Net Interest Income m -1,093 -1,130 -1,081 -1,023 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m -57 0 0 0 Exceptionals m -70 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m -13 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m -80 269 252 299 Pre-Tax Profit m -16 522 1,014 1,191 Tax Expense m 50 -67 -32 -75 Tax Expense m 63 -99 -203 -238 Net Profit m -30 202 220 224 Net Profit m 47 422 811 953 Minority Interests m 105 -5 -57 -6 Minority Interests m 174 -63 -104 -122

Reported Earnings m 76 197 163 218 Reported Earnings m 221 360 707 831 Adjusted Earnings m 132 197 163 218 Adjusted Earnings m 291 360 707 831

EPS (rep) 0.04 0.10 0.08 0.11 EPS (rep) 0.11 0.17 0.34 0.40 EPS (adj) 0.06 0.10 0.08 0.11 EPS (adj) 0.14 0.17 0.34 0.40 EPS Growth yoy (adj) % -29.4 23.7 23.2 11.1 EPS Growth (adj) % -55.2 23.5 96.7 17.5

PE (rep) x 22.7 13.9 7.1 6.0 PE (adj) x 17.2 13.9 7.1 6.0

EBITDA Margin % 14.0 14.8 14.3 13.7 Total DPS 0.02 0.03 0.07 0.08 EBIT Margin % 6.0 7.9 7.4 7.2 Total Div Yield % 0.9 1.4 2.8 3.3 Earnings Split % 45.4 54.7 45.3 30.9 Weighted Average Shares m 2,062 2,062 2,062 2,062 Revenue Growth % 11.0 1.5 18.7 9.8 Period End Shares m 2,062 2,062 2,062 2,062 EBIT Growth % 27.7 42.0 45.8 0.9


Revenue Growth % 11.3 10.0 9.8 5.5 EBITDA m 2,286 2,808 3,270 3,420 EBITDA Growth % 13.1 20.4 15.1 4.5 Tax Paid m 63 -99 -203 -238 EBIT Growth % -2.2 44.0 26.9 5.7 Chgs in Working Cap m -1,557 -34 -4 369 Gross Profit Margin % 15.5 17.3 18.5 18.7 Net Interest Paid m -1,093 -1,130 -1,081 -1,023 EBITDA Margin % 13.3 14.5 15.2 15.1 Other m 2,257 0 0 0 EBIT Margin % 5.8 7.6 8.8 8.8 Operating Cashflow m 1,957 1,545 1,982 2,528 Net Profit Margin % 0.2 1.9 3.4 3.8 Acquisitions m -87 -87 -87 -87 Payout Ratio % 15.2 20.0 20.0 20.0 Capex m -3,921 -442 -465 -688 EV/EBITDA x 9.0 7.5 6.5 6.2 Asset Sales m 0 0 0 0 EV/EBIT x 20.6 14.3 11.3 10.7 Other m 1,363 -69 -69 -69

Investing Cashflow m -2,646 -599 -621 -844 Balance Sheet Ratios Dividend (Ordinary) m -122 -44 -72 -141 ROE % 2.1 2.6 4.9 5.5 Equity Raised m 0 0 0 0 ROA % 2.5 3.5 4.5 4.5 Debt Movements m 2,500 -500 0 0 ROIC % -10.6 4.1 4.9 5.2 Other m 0 0 0 0 Net Debt/Equity % 129.7 135.2 121.2 106.3 Financing Cashflow m 2,378 -544 -72 -141 Interest Cover x 1.0 1.5 1.9 2.2 Price/Book x 0.4 0.4 0.3 0.3 Net Chg in Cash/Debt m 1,689 402 1,289 1,542 Book Value per Share 6.7 6.8 7.1 7.5

Free Cashflow m -1,964 1,102 1,517 1,840

Balance Sheet 2012A 2013E 2014E 2015E Cash m 4,456 2,745 4,034 5,576 Receivables m 8,376 8,423 8,439 8,078 Inventories m 4,413 4,878 5,376 5,683 Investments m 0 0 0 0 Fixed Assets m 24,865 25,379 25,915 26,675 Intangibles m 20 0 0 0 Other Assets m 5,595 3,953 3,953 3,953 Total Assets m 47,725 45,379 47,718 49,965 Payables m 4,525 5,003 5,513 5,828 Short Term Debt m 12,876 12,876 12,876 12,876 Long Term Debt m 10,189 9,689 9,689 9,689 Provisions m 0 0 0 0 Other Liabilities m 5,789 3,149 4,343 5,585 Total Liabilities m 33,380 30,738 32,442 33,999 Shareholders' Funds m 13,759 14,075 14,710 15,400 Minority Interests m 586 586 586 586 Other m 0 0 0 0 Total S/H Equity m 14,345 14,661 15,296 15,986 Total Liab & S/H Funds m 47,725 45,399 47,738 49,985

All figures in Rmb unless noted. Source: Company data, Macquarie Research, June 2013



19 June 2013 42

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return

Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging,

IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2013

AU/NZ Asia RSA USA CA EUR Outperform 45.12% 53.24% 50.00% 40.70% 62.98% 43.30% (for US coverage by MCUSA, 10.55% of stocks followed are investment banking clients)

Neutral 41.52% 28.01% 41.43% 55.01% 32.60% 34.10% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients)

Underperform 13.36% 18.74% 8.57% 4.29% 4.42% 22.60% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)

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Tel: (069) 509 578 000

Manila Tel: (63 2) 857 0888

Perth Tel: (618) 9224 0888

Toronto Tel: (1 416) 848 3500

Geneva

Tel: (41) 22 818 7777

Melbourne Tel: (613) 9635 8139

Seoul Tel: (82 2) 3705 8500

Hong Kong

Tel: (852) 2823 3588

Montreal Tel: (1 514) 925 2850

Shanghai Tel: (86 21) 6841 3355

Available to clients on the world wide web at www.macquarieresearch.com and through Thomson Financial, FactSet, Reuters, Bloomberg, and CapitalIQ.


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Asia Research Head of Equity Research John O’Connell (Global – Head) (612) 8232 7544 Peter Redhead (Asia – Head) (852) 3922 4836

Automobiles/Auto Parts Janet Lewis (China) (852) 3922 5417 Amit Mishra (India) (9122) 6720 4084 Clive Wiggins (Japan) (813) 3512 7856 Michael Sohn (Korea) (82 2) 3705 8644

Banks and Non-Bank Financials Ismael Pili (Asia, Hong Kong) (852) 3922 4774 Victor Wang (China) (852) 3922 1479 Suresh Ganapathy (India) (9122) 6720 4078 Nicolaos Oentung (Indonesia) (6221) 2598 8366 Alastair Macdonald (Japan) (813) 3512 7476 Chan Hwang (Korea) (822) 3705 8643 Matthew Smith (Malaysia, Singapore) (65) 6601 0981 Alex Pomento (Philippines) (632) 857 0899 Dexter Hsu (Taiwan) (8862) 2734 7530 Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates Alex Pomento (Philippines) (632) 857 0899 Somesh Agarwal (Singapore) (65) 6601 0840

Consumer and Gaming Gary Pinge (Asia) (852) 3922 3557 Linda Huang (China, Hong Kong) (852) 3922 4068 Amit Mishra (India) (9122) 6720 4084 Lyall Taylor (Indonesia) (6221) 2598 8489 Toby Williams (Japan) (813) 3512 7392 HongSuk Na (Korea) (822) 3705 8678 Alex Pomento (Philippines) (632) 857 0899 Somesh Agarwal (Singapore) (65) 6601 0840 Best Waiyanont (Thailand) (662) 694 7993

Emerging Leaders Jake Lynch (China, Asia) (8621) 2412 9007 Adam Worthington (ASEAN) (852) 3922 4626 Michael Newman (Japan) (813) 3512 7920

Industrials Janet Lewis (Asia) (852) 3922 5417 Patrick Dai (China) (8621) 2412 9082 Saiyi He (China) (852) 3922 3585 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Andy Lesmana (Indonesia) (6221) 2598 8398 Kenjin Hotta (Japan) (813) 3512 7871 Juwon Lee (Korea) (822) 3705 8661 Sunaina Dhanuka (Malaysia) (603) 2059 8993 David Gambrill (Thailand) (662) 694 7753

Insurance Scott Russell (Asia, Japan) (852) 3922 3567 Chung Jun Yun (Korea) (822) 2095 7222

Software and Internet David Gibson (Asia) (813) 3512 7880 Jiong Shao (China, Hong Kong) (852) 3922 3566 Steve Zhang (China, Hong Kong) (852) 3922 3578 Nitin Mohta (India) (9122) 6720 4090 Nathan Ramler (Japan) (813) 3512 7875 Prem Jearajasingam (Malaysia) (603) 2059 8989 Alex Pomento (Philippines) (632) 857 0899

Oil, Gas and Petrochemicals James Hubbard (Asia) (852) 3922 1226 Jal Irani (India) (9122) 6720 4080 Polina Diyachkina (Japan) (813) 3512 7886 Brandon Lee (Korea) (822) 3705 8669 Sunaina Dhanuka (Malaysia) (603) 2059 8993 Trevor Buchinski (Thailand) (662) 694 7829

Pharmaceuticals and Healthcare Abhishek Singhal (India) (9122) 6720 4086 Eunice Bu (Korea) (822) 2095 7223

Property Callum Bramah (Asia) (852) 3922 4731 David Ng (China, Hong Kong) (852) 3922 1291 Jeffrey Gao (China) (8621) 2412 9026 Abhishek Bhandari (India) (9122) 6720 4088 Andy Lesmana (Indonesia) (6221) 2598 8398 Sunaina Dhanuka (Malaysia) (603) 2059 8993 Alex Pomento (Philippines) (632) 857 0899 Tuck Yin Soong (Singapore) (65) 6601 0838 Corinne Jian (Taiwan) (8862) 2734 7522 David Liao (Taiwan) (8862) 2734 7518 Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining Ivan Lee (Asia) (852) 3922 3572 Graeme Train (China) (8621) 2412 9035 Matty Zhao (Hong Kong) (852) 3922 1293 Rakesh Arora (India) (9122) 6720 4093 Adam Worthington (Indonesia) (852) 3922 4626 Riaz Hyder (Indonesia) (6221) 2598 8486 Polina Diyachkina (Japan) (813) 3512 7886 David Liao (Taiwan) (8862) 2734 7518 Chak Reungsinpinya (Thailand) (662) 694 7982 Andrew Dale (852) 3922 3587

Technology Jeffrey Su (Asia, Taiwan) (8862) 2734 7512 Steve Zhang (China, Hong Kong) (852) 3922 3578 Nitin Mohta (India) (9122) 6720 4090 Claudio Aritomi (Japan) (813) 3512 7858 Damian Thong (Japan) (813) 3512 7877 David Gibson (Japan) (813) 3512 7880 George Chang (Japan) (813) 3512 7854 Daniel Kim (Korea) (822) 3705 8641 Soyun Shin (Korea) (822) 3705 8659 Andrew Chang (Taiwan) (8862) 2734 7526 Daniel Chang (Taiwan) (8862) 2734 7516 Tammy Lai (Taiwan) (8862) 2734 7525

Telecoms Nathan Ramler (Asia, Japan) (813) 3512 7875 Danny Chu (China, Hong Kong) (852) 3922 4762 Riaz Hyder (Indonesia) (6221) 2598 8486 Prem Jearajasingam (Malaysia, Singapore) (603) 2059 8989 Alex Pomento (Philippines) (632) 857 0899 Joseph Quinn (Taiwan) (8862) 2734 7519

Transport & Infrastructure Janet Lewis (Asia, Japan) (852) 3922 5417 Bonnie Chan (Hong Kong) (852) 3922 3898 Nicholas Cunningham (Japan) (813) 3512 6044 Sunaina Dhanuka (Malaysia) (603) 2059 8993 Corinne Jian (Taiwan) (8862) 2734 7522

Utilities & Renewables Ivan Lee (Asia) (852) 3922 3572 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Prem Jearajasingam (Malaysia) (603) 2059 8989 Alex Pomento (Philippines) (632) 857 0899

Commodities Colin Hamilton (Global) (4420) 3037 4061 Jim Lennon (4420) 3037 4271 Duncan Hobbs (4420) 3037 4497 Graeme Train (8621) 2412 9035 Rakesh Arora (9122) 6720 4093

Economics Peter Eadon-Clarke (Asia, Japan) (813) 3512 7850 Aimee Kaye (ASEAN) (65) 6601 0574 Richard Gibbs (Australia) (612) 8232 3935 Tanvee Gupta (India) (9122) 6720 4355

Quantitative / CPG Gurvinder Brar (Global) (4420) 3037 4036 Josh Holcroft (Asia). (852) 3922 1279 Burke Lau (Asia) (852) 3922 5494 Simon Rigney (Asia, Japan) (852) 3922 4719 Eric Yeung (Asia) (852) 3922 4077 Suni Kim (Japan) (813) 3512 7569

Strategy/Country Viktor Shvets (Asia) (852) 3922 3883 Chetan Seth (Asia) (852) 3922 4769 Joshua van Lin (Asia Micro) (852) 3922 1425 Peter Eadon-Clarke (Japan) (813) 3512 7850 David Ng (China, Hong Kong) (852) 3922 1291 Jiong Shao (China) (852) 3922 3566 Rakesh Arora (India) (9122) 6720 4093 Nicolaos Oentung (Indonesia) (6121) 2598 8366 Chan Hwang (Korea) (822) 3705 8643 Yeonzon Yeow (Malaysia) (603) 2059 8982 Alex Pomento (Philippines) (632) 857 0899 Conrad Werner (Singapore) (65) 6601 0182 Daniel Chang (Taiwan) (8862) 2734 7516 David Gambrill (Thailand) (662) 694 7753 Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales Robin Black (Asia) (852) 3922 2074 Chris Gray (ASEAN) (65) 6601 0288 Peter Slater (Boston) (1 617) 598 2502 Jeffrey Shiu (China & Hong Kong) (852) 3922 2061 Thomas Renz (Geneva) (41) 22 818 7712 Bharat Rawla (India) (9122) 6720 4100 Miki Edelman (Japan) (813) 3512 7857 John Jay Lee (Korea) (822) 3705 9988 Chris Gould (Malaysia) (603) 2059 8888 Gino C Rojas (Philippines) (632) 857 0861 Eric Roles (New York) (1 212) 231 2559 Paul Colaco (New York) (1 212) 231 2496 Sheila Schroeder (San Francisco) (1 415) 762 5001 Erica Wang (Taiwan) (8862) 2734 7586

Regional Heads of Sales cont’d Angus Kent (Thailand) (662) 694 7601 Angus Innes (UK/Europe) (44) 20 3037 4841 Sean Alexander (Generalist) (852) 3922 2101

Regional Head of Distribution Justin Crawford (Asia) (852) 3922 2065

Sales Trading Adam Zaki (Asia) (852) 3922 2002 Phil Sellaroli (Japan) (813) 3512 7837 Matthew Ryan (Singapore) (65) 6601 0216

Sales Trading cont’d Mike Keen (Europe) (44) 20 3037 4905 Chris Reale (New York) (1 212) 231 2555 Marc Rosa (New York) (1 212) 231 2555 Stanley Dunda (Indonesia) (6221) 515 1555 Kenneth Cheung (Malaysia) (603) 2059 8888 John Fajardo (Philippines) (632) 857 0840 Michael Santos (Philippines) (632) 857 0813 Isaac Huang (Taiwan) (8862) 2734 7582 Dominic Shore (Thailand) (662) 694 7707


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