Nine Dragons Paper (Holdings) Ltd, China's largest containerboard producer, said it will adopt a conservative approach in business expansion in the coming year given that sales have been stymied amid the cautious spending atmosphere on the mainland.
The company has encountered the "severest operating pressures" last year since it was founded in 1995, Nine Dragons Chairwoman Cheung Yan, once the richest woman on the mainland according to Forbes, said in Hong Kong during a media briefing to announce the company's annual results on Wednesday.
Although sales increased 11.5 percent to 27.2 billion yuan ($4.32 billion) last year, Nine Dragons posted a net profit of 1.42 billion yuan for the full year ended June 30, 2012, down 27.8 percent over the 1.97 billion yuan a year earlier, according to a statement to the city's stock exchange.
The papermaker attributed the lackluster results to the "severe and complex economic conditions at home and abroad" which has undermined both the paper consumption as well as group profits.
Average selling prices of paper products decreased by around 10 percent on the mainland last year, according to Cheung, who added that the company will adopt a cautious and conservative manner in operation in the short run as sales were sluggish during the past three months.
However, Cheung emphasized that the difficulties encountered last year only reflects macroeconomic slowdown rather than an oversupply in the industry. Despite dropping prices, Nine Dragons remained in full production this time as compared with 2008 when the company halted part of its capacity to counter the shrinking demand.
"The whole sector is likely to be bottoming out in the fourth quarter while sales enter the traditional peak season," said Cheung, who added that the company also expects the selling prices of paper products to hike 10 percent from the current level.
Total production capacity of the company was 11.45 million tons per annum as of the end of June, while construction of new bases and new paper machines remained under way, according to Nine Dragons, which expects the company's total production capacity to reach 14 million tons by June 2014.
A Citi report by analyst Eric Lau said Nine Dragons earnings missed consensus, and it also expects a recent rebound of recovered paper costs to drive average selling price higher starting in October or November and lead to a marginal recovery.
Another Merrill Lynch note maintains a neutral view on Nine Dragon shares, cutting the target prices to HK$5 from HK$5.9 as it "doesn't expect recovery in the paper manufacturing industry in 2013," according to analysts Bruce Wang and Shi Yongtao from the bank.
Share of Nine Dragons dropped 4.4 percent to close at HK$3.73 in its Hong Kong trading on Wednesday, compared with the 0.83 percent loss of the city's benchmark Hang Seng Index. The stock has slumped about 24 percent so far this year.