|
Chairlady's Statement in the 2007/08 Annual Report
Dear Shareholders,
I am delighted to present to you the Annual Report of ND Paper for the year ended 30 June 2008.
FY2008 is a challenging year for us. The world economy and China's packaging paperboard manufacturing industry have been subject to repercussions from the sub-prime crisis in the United States of America, Renminbi appreciation, the snowstorm in central and southern China, the earthquake in the Sichuan Province that accentuated a negative overtone on the macroeconomic environment and together with substantial increases in prices of commodities (including thermal coal and crude oil) and the volatility of recovered paper prices. Leveraging its core competencies, ND Paper has been able to flexibly adjust its strategies to accommodate the rapidly changing market and meet the challenges from the operating environment. During the year under review, the Group had been seeking geographical diversity in its expansion as it was reinforcing its well-balanced blueprint for development of its paperboard manufacturing business. Meanwhile, we widened our product range, improved our product quality and expanded reasonably our capacities. We enlarged our scale of operation to boost our cost-competitiveness. These efforts established a firm footing for securing our position as the largest packaging paper manufacturer in Asia, making ourselves fully prepared to embrace imminent economic recovery.
Thanks to the hard work from all members of our staff, the Group achieved total revenue of RMB14,113.6 million, representing an increase of approximately 43.5% as compared with the last financial year. Gross profit was approximately RMB2,872.3 million, up 13.6% from the last financial year. Despite revenue is significantly higher than that of the previous financial year, the gross margin narrowed to 20.4% as a result of the slowdown in world economy, rising commodity costs and the erratic volatilities in recovered paper prices. The profit attributable to equity holders of the Company was RMB1,876.9 million. Earnings per share were RMB0.44.
Despite this less-than-favourable market environment, as a note of thank to the support of shareholders for ND Paper over the years, the Board of Directors proposed payment of a final dividend of RMB3.50 cents per share. Including the interim dividend of RMB1.68 cents already paid, the total payout for the year was RMB5.18 cents. Dividend payout ratio was about 12%.
IMPLEMENTATION OF LONG-TERM GROWTH STARTEGIES AND DIVERSIFICATION, GETTING PREPARED FOR THE MARKET CONSOLIDATION
The world economy has started to show signs of slowing down in 2008 due to the deepening impact from the sub-prime crisis in the US. This, when added to the effect of natural disasters, high volatility in commodity prices and rapid deterioration of the general economic environment has inflicted considerable impact on the packaging paperboard manufacturing industry in China. As the industry leader, ND Paper stays vigilant to the rapid changes in the operating environment. We maintain close scrutiny to factors including demand-supply dynamics, diverse needs of customers and new government policies. We develop appropriate measures to accommodate the market consolidation and manage our risks. ND Paper's competitive edge does not rest on a single market or a single product, but on its ability to implement diversified strategies, including use of its access export markets to adjust the domestic/export sales proportions. Thanks to the economies of scale we achieved, we have been able to maintain sustainable development and long-term growth in terms of our business scope and scale of operation in a slackening economic environment.
Expanding containerboard production capacity in a flexible way to match industry consolidation and better economies of scale
The demand for containerboard continues to grow despite the slowing world economy. Thanks to its leading market position, ND Paper saw sustaining strength in its customer orders. Market demand stayed to be strong, as the utilization rate of our existing and newly added paper machines continued to rise while our inventory were maintained at reasonable levels. Meanwhile, the PRC Government intensified enactment of its environmental protection laws and launched policies that accelerated elimination of small paper making mills which failed to meet the requirements under the new policies or with inferior production technologies. According to industry statistics of China's paper manufacturing sector, against a backdrop of increasing capacities for the industry as whole, 2007 saw a reduction in number of paper manufacturing enterprises with an annual revenue of RMB5 million or above by 376 from 2006, indicating continuing industry consolidation. The pace of consolidation was speeding up as in the first four months of 2008, about 139 paper making enterprises were closed. Large plants with capacities of 300,000 tpa or higher are set to benefit from this trend of rapid industry consolidation and absorb market shares released by closure of small-scale capacities.
Capitalizing on the growing demand for containerboard, we initiated a detailed plan in as early as FY2006 to improve our economies of scale and strengthen our cost-competitiveness. We have been monitoring closely the demand-supply dynamics in the market and adjusted our portfolio of capacities to accommodate the consolidation in the industry. During the year under review, we adhered to our original plan to increase capacities in the Dongguan and Taicang bases while building new paper machines and ancillary infrastructural facilities in the Chongqing and Tianjin bases. Until the end of June 2008, ND Paper's total design capacity of packaging paperboard in China reached 6.95 million tpa. Well-balanced geographical coverage in China, ready to expand into Asia
Already the largest player of its kind in Asia, ND Paper is now the only packaging paperboard manufacturer with production bases located in four key economic regions in China and in Vietnam. This comprehensive geographical coverage enables the Group to satisfy demand for containerboard from all regions and complement the demand and supply among the regions, effectively reducing the risk of single market concentration.
In addition to Dongguan and Taicang, during the year ND Paper has established its third base in Chongqing. Production in this new base already commenced in August 2008 with an initial capacity for the first year aggregating 0.8 million tpa. Foundation work and infrastructure preparation for our fourth production base in Tianjin has been progressing smoothly. This new base is scheduled to commence production in June 2009 with an initial capacity of 0.8 million tpa. This Tianjin base will serve customers in northern and northeastern China. At the moment, demand in these regions is mainly met by small-scale capacities with limited supply. This market landscape favours largescale packaging paperboard manufacturers. The Tianjin base is well-connected to major transportation infrastructure. It has direct access to a supplementary rail nearby for transportation of coal, raw materials and finished products. It is 30km away from the Tianjin Port that provides ocean-bound transportation support. There is also ample high quality supply of water to support production in the Tianjin base.
We stay vigilant to opportunities in other regions in Asia of good potential in addition to satisfying the escalating demand in our domestic market. In May 2008, we acquired 60% equity interest of a paper mill in Vietnam – Cheng Yang Paper Mill Co. Ltd. We have decided to hold back our plan to expand capacity there in light of the prevailing volatility in the Vietnamese economy. However, we are still sanguine about the potential of the market in Vietnam in the long run. We believe that this investment in Vietnam can help establish a strong foundation for ND Paper for its expansion into overseas markets. We shall revive the plan as soon as the economy there recovers and initiate our expansion into Asia. Improving resilience to market risks by broadening product range and client mix
ND Paper has long been putting customers in the highest priority and offering a comprehensive product range to provide customers in different industries with a wide array of choices accommodating their specific needs. China's continuing economic growth will drive the development of the consumer market. Participants in this industry constitute a major target group that we shall concentrate our effort to tap. During the year, we proactively broadened our product range to launch light weight high performance corrugating medium product series in June 2008 using two newly installed high-speed paper machines. This series is fully compliant to the "3R" principles – Reduce, Reuse, Recycle – and comes on the top of our three major packaging paper product categories, including linerboard (kraftlinerboard, testlinerboard and white top linerboard), high performance corrugating medium and coated duplex board. In addition, we commenced production of light weight linerboard and launched it in the market in 2008. Products that are of high quality and compliant with environmental protection principles are well received by customers with encouraging order flow. As smallscale paper mills are yet to catch up with new technologies and facilities (such as large-scale high-speed paper machines), new product launches not only replace traditional products, but also help accelerate industry consolidation.
ND Paper is also exploring into other high value, high return products to improve its product mix. During the year, we acquired high value specialty paper (primarily for production of electric insulating paper and capacity tissue paper) project in Leshan, Sichuan; wood and bamboo pulp projects and plan to pursue production of liquid packaging paper products (such as aseptic and non-aseptic liquid packaging board, other coated packaging board, food packaging board, cup stock and other high end packaging paper). However, as the world economy is slowing down, we have decided to concentrate our resources in the existing businesses and hold back our production plans on high value specialty paper and liquid paper packaging products until a better timing. Tightening cost control and expanding raw material sourcing
During the year under review, commodity prices, including thermal coal, rose more than 60% while recovered paper prices remained very volatile, inflicting impact on the packaging paperboard manufacturing industry and putting pressure on the Group's gross margin. Despite having implemented appropriate measures to mitigate risks inherent in escalating cost pressure, we had been able to pass on only some of the rises in costs to customers, their capacity of absorbing price increases was protracted in light of the worsening economic environment. Working in parallel, we are developing new manufacturing methods that enable us to use lower-cost raw materials without sacrificing product quality in order to strengthen our competitiveness, while minimizing the impact on our gross margin.
On sourcing of raw materials, ND Paper had been during the year proactively expanding its channels from which it sources recovered paper to reduce its reliance on a single supplier. We sourced high quality recovered paper from a wider array of geographical locations globally (including the US, Europe, Australia and Japan, etc.). We shall also increase the proportion of high quality recovered paper procured from the domestic market in China in an effort to alleviate pressure arising from volatile recovered paper prices in the international market. ND Paper has established a long-term target of diversifying into upstream and resource business and in the process of identifying pulp production projects to secure stable supplies of pulp at competitive costs, ultimately building a fully-integrated enterprise from forestry, pulp to paper. Adhering to environmental protection principle and "people-based" principle
In the recent years, the PRC Government has been strengthening the country's education on environmental protection to increase the awareness of its people in this area. This, when coupled with the increasingly stringent requirement for environmental protection year after year, reaffirms the PRC Government's determination in strengthening its environmental protection efforts. As an industry leader, ND Paper strives to stay close to its philosophy of "No Environment, No Paper" by observing strictly to the highest environmental protection standards through deployment of raw materials, production facilities, technologies and production processes that not only meet but exceed the most stringent requirements. During the year, we invested in new facilities for monitoring processing and disposal of sewage, solid wastes, exhaust fumes and noise. We launched products that comply with "3R" principle to reinforce our value towards protecting the environment. We envisage the PRC Government to tighten the country's laws on environmental protection further. We shall continue to implement high environmental protection standards and maximize our use of recovered paper as raw materials through reforms in technology. We strive to establish ourselves as a role model on protection of the environment in the industry.
ND Paper adheres strictly to its "People-based" principle and put strong emphasis on building relationship with staff members and on human resources development. During the year, we strengthened our mutual-trust based relationship with our staff. We provide them with the protection they deserve under the new Labour Contract Law and an ideal working environment as we worked closely with relevant government departments and labour associations. We received high recognition from relevant government departments and labour associations in the areas of human resource management principles and compliance with applicable labour laws. In terms of human resources development, we proactively invite international professional managers to join our team and strengthen our management. We strive to boost loyalty among staff members by providing them a pleasant working and living environment and opportunities to polish up their capabilities through internal staff training programmes. These efforts help them release their potential at work to contribute to creation of better value for shareholders.
OUTLOOK
As the world economy will continue to be surrounded by uncertainties, inflicting unprecedented difficulties and challenges on the operating environment of China's paper making industry. ND Paper is well-prepared and ready to embrace these challenges as it developed a three-pronged strategy:
First, keep capital expenditure under stringent control and maintain adequate cash flow
- adjust downwards the capital expenditure budget for 2009 to RMB2.2 billion from originally planned RMB3.0 billion;
- completed the 2.4 million tpa capacity expansion plan in 2008 and secure delivery of capacities of 0.8 million tonnes for the Tianjin base before June 2009 with total capacity reaching over 8.7 million tonnes by 2009, while postponing other capacity expansion plans to 2010 or 2011 and beyond.
Second, strengthen internal control and upgrade core competencies
- concentrate our efforts in strengthening control on costs and sales risks to maintain our profitability at reasonable levels in light of the unfavourable market environment.
Third, reform our management structure and polish up ourselves
- reform and adjust our management structure by recruiting international high-calibre professional managers; combine their management experiences with our unique management philosophy and extensive technologies. ND Paper management sees the current economic difficulties as an opportunity to polish up ourselves and we will capture this opportunity to become a strong industry leader.
As the world economy continues to be in doldrums, the consolidation within the industry is accelerating to a stage where the process is facing bottlenecks. Full of confidence and without fear, we see the current difficulties as an opportunity to polish up ourselves. We proactively reform and upgrade our internal management, exercise stringent costs control, as well as enhance production automation continuously. We are progressing into a higher level leveraging our proven track record, regional strength, strong market share and wide geographical coverage achieved in the last decade. ND Paper will emerge unscathed by the difficult environment due to its strong management capability, unique business philosophy as an industry leader. Leveraging on our large-scale capacity of over 8.7 million tonnes, we are preparing ourselves for embracing opportunities in the economic recovery ahead to create enormous returns for shareholders and perpetuate ND Paper into a century-old enterprise.
APPRECIATION
It has been 10 years now since ND Paper commenced production from its first paper machine. I would like to take this opportunity to extend my regards and appreciation to our management and staff for their whole-hearted devotion to the Group's development. Thanks to their diligent work, we have been able to sustain our development during the last exceptionally challenging year. I would also express my sincere appreciation to various governments, labour associations, shareholders, investors, bankers and business partners for their ardent support. We look forward to continuing to share with all of them our accomplishments in the future.
Cheung Yan
Chairlady
Hong Kong, 10 October 2008
|
