Nine Dragons Declines After Morgan

Nine Dragons Declines After Morgan Stanley Downgrade (Update2)
By Lee Spears and Chua Kong Ho - February 20, 2009 04:37 EST


Zhang Yin, owner and founder of Nine Dragons

Feb. 20 (Bloomberg) -- Nine Dragons Paper Holdings Ltd., China’s biggest maker of containerboard paper for packaging, fell the most in a month in Hong Kong after Morgan Stanley cut the stock’s rating, saying the company needs to reduce debt.

The papermaker fell 9.5 percent to HK$2.38 at the close, the steepest decline since Jan. 20 and the lowest value since Feb. 5. Hong Kong’s benchmark Hang Seng Index fell 2.5 percent.

Nine Dragons’s gearing, the ratio of debt to equity, will remain as high as 90 percent by the end of the company’s current fiscal year on June 30, Morgan Stanley analysts Charles Spencer and Mean Phil Chong wrote in a note to investors today. They downgraded their rating on Nine Dragons’s stock to “equal-weight” from “overweight,” reversing a Jan. 29 upgrade.

“The company needs to reduce its gearing further, preferably through improved operating means instead of financial engineering, before confidence is restored in the company,” the analysts wrote in the report.

Nine Dragons on Feb. 9 said it would buy back $284 million of five-year notes less than 10 months after selling them, following reports the company risked bankruptcy. The papermaker follows Asian companies including billionaire Li Ka-shing’s Hutchison Whampoa Ltd. and Lui Che-woo’s Galaxy Entertainment Group Ltd. in buying back bonds since November to lower debt and cut interest payments after securities prices plunged.

Operations Normal

The company in December said its operations were normal and it wasn’t involved in any bankruptcy filings, denying reports by Times Weekly, a Guangzhou-based newspaper, and other publications. Miranda Fok at Wonderful Sky Financial Group, which handles public relations for Nine Dragons, said the company is unable to make any public comment because it is in a “black-out” period ahead of the March 9 deadline for its bond buy-back tender.

The company’s net debt ratio more than doubled in two years to 104 percent of shareholders’ equity as of Dec. 31, according to information compiled by Bloomberg.

Nine Dragons is “too big to fail,” said Kary Sei, an analyst at ICEA Securities Ltd. in Hong Kong. The company’s debt ratio “is high but it may not be too high. This industry is capital intensive and the machinery is very expensive.”

The company is also helped by improved credit markets since the end of last year, said Sei, who cut his rating on the stock to “reduce” on Feb. 19 on concerns that sales won’t recover.

Tough Environment

Nine Dragons’s fiscal first-half profit fell 69 percent to 323 million yuan ($47 million) and sales fell 5.3 percent to 6.3 billion yuan because of a global recession and higher raw-material costs, the Hong Kong-based company said on Feb. 18. The business environment will “remain tough,” the earnings statement said.

The drop prompted at least three analysts including Morgan Stanley’s Spencer to downgrade the shares. The broker maintained its HK$3 target price made on Feb. 9.

Nine Dragons’s shares have gained 7.7 percent this year compared with a decline of 12 percent for the Hang Seng Index. They fell 89 percent last year, while Hong Kong’s benchmark index dropped 48 percent.

The company is controlled by Zhang Yin, who was named China’s richest person in 2006 by the Shanghai-based Hurun Report. Her wealth declined by $8.4 billion last year as Nine Dragons’s share price plummeted, Hurun said in October.

NDP issued profit warning, revising sale and profit forecast downward the rating agencie responded with another downgrade, Fitch pushing NDP's outstanding note down to BB- According to Financial morningstar, reported to the gross profit of company has a growth rate in 2006-2014 that means NDP is not trouble.
Although she took a high level of risk by in high dept it's because preparation for the future and she would be the first in the market that can buil the confident for a potential investor

y January 2009 the world economy was spiraling downward. Squeezed by market conditions and
burdened by debt, Nine Dragons Paper (NDP), the largest paperboard manufacturer in Asia and second largest
in the world, saw its share price drop to HK$ 2.33, 90% off its high and less than half of book value. As the
economic crisis of 2008 bled into 2009, export-oriented industries suffered. Rumors had been buzzing since
October that NDP was on the ropes. It was carrying so much debt that more than one analyst was asking "Will
they go bust?" Was the financial crisis of 2008 about to claim another victim, or had friction between the
global economic crisis and the company's debt ignited jittery nerves in the global markets?


จากรูปภาพที่5 Fitch pushing NDP has been investing at an incredible pace – best demonstrated by comparing the company’s cash flows from operating activities in 2007 and 2008 with the cash flows from investing activities. The short-fall in operating cash flow must then be made up by financing activities – which has been both raising equity and debt – but mostly debt
NDP has clearly been profitable in recent years, and demonstrates a high rate of profitability one would not ordinarily see in this type of semi-commodity based business
NDP’s rate of profitability, however, has been sliding, reflecting rising input prices and greater competitive markets for its products
The company’s growing debt burden is large and getting larger; most analysts and investors clearly wish Mrs. Cheung would slow her capital expenditure plan – at least a bit – to take growing cash flow and debt-service pressure off the company during the global recession and credit crisis