China Paper

The next candidate for my cash rich portfolio and testing of Graham's Cash rich firm theory, China Paper comes to met these requirements.

Company :China Paper

General information:

The Group currently produces two main categories of products, namely paper products and paper chemical products. Paper products are its core business and this category is split into four types:
I) Printing paper – Used for general printing of books and reading materials.
II) Lightweight packing paper – For wrapping and packaging of clothes, clothing accessories, shoes etc.
III) Newsprint paper – Used in printing newspapers, flyers or brochures. Iv) Semi-finished toilet paper – Sold to customers requiring further treatment to produce finished toilet paper

Reward

• Price Advantage-Current market share price ranges within 0.12-14 as @ 26April 2008 give significant margins to...


• Net cash value is 17cents which gives me a 28% pure discount margin of safety.
  Intrinsic value is 30cents which gives me a 58% discount to intrinsic value (average)


• EPS of 7 SG cents for FY 2008 /ROE of 0.15%-0.13% on average


• Strong cash flows/Strong balance sheet


• Industry looks resilient and business model resembles more of a need then that of a want


• Cash rich company which is expanding, in times such as these. Indication of good management decisions


• Deal with recent problems such as environment water treatment plants, swiftly and efficiently.


• Possible to receive high dividends this year.


• Growth:

Development of new products:
The construction of the production facilities for coated paper by subsidiary Linyi Zhenyuan Paper Co. Ltd. Using $210million RMB which is funded by internal funding coated paper is generally used for printing a broad range of materials, including high quality magazines, leaflets, advertisements, brochures and educational materials.

Expansion in capacity:
Expand the production capacity of its existing paper chemical products facility using $80million RMB funded by internal funding

Huge untapped market potential: In the Shandong Province alone, there are just 22 players left from the previous 320 due to such regulations. Hence the industry trend can play nicely into China Paper’s hands.

Risks
Biggest risks involving S-shares are governance, as such the following have to be take noticed of:

• Should not be taking extra loans due to high amounts of cash in it’s cash balances as of FY 2009


• Take note of the usage of the cash reserves, they either have to declare dividends or expand.


• Take note of more fund raising (done it twice so far), twice once in IPO the other in addition of 42million as at Aug 22nd 2008, possible red flag here.


• Take note of sudden changes to independent directors


• Ensure that receivable do not spike without a proper reason. Current total receivables are 108m RMB relative low when compared to 300m+ RMB in cash.


• Low liquidity, share price might stay stagnant for quite some time.


• Competitors are unknown. Future IV will depend on how they expand and how prudent the management is.


• Company might lack economic moat, despite resilience of industry, not much is known about its competitors. Or how easy it is for others to compete its profits away

What others say:
In light of the economic crisis in China, sectors that have been flagged out to be
relatively resilient are paper production, printing, tobacco and health care, just to name a few.
China Paper’s growth is also strongly supported by the rampant education sector in China,
which can be said to be recession-proof in some ways. Moreover, in China today, there is a
strong demand and a general under supply for printing paper. This was mainly due to
environmental regulations causing the shut down of smaller uncoated printing paper players
since mid-2007, leading to a drop in supply of 6.5m tonnes/annul. In the Shandong Province
alone, there are just 22 players left from the previous 320 due to such regulations. Hence the
industry trend can play nicely into China Paper’s hands.