UBS: Maintaining Nine Dragons Paper's (02689) “Buy” Rating Target Price of HK$11.82, Continuing to Expand Pulp Production Capacity and Resume Dividends

The Zhitong Finance App learned that UBS released a research report stating that it maintains the “buy” rating of Nine Dragons Paper (02689), with a target price of HK$11.82. The company's net profit for the 2026 fiscal year ended the end of June rose 103% year on year to 3.58 billion yuan, close to the company's profit guideline limit; paper sales rose 14% year on year to 24.5 million tons, slightly higher than the bank's forecast of 24.4 million tons; gross margin increased 3.1 percentage points to 14.6% year on year, higher than the bank's forecast of 14.1%. Profit growth was driven by a faster increase in average sales prices than rising fiber and energy costs, reversing the pressure on the industry's overall profit margins. Management indicated that paper sales remained flat in FY2027, and pulp production increased by 1 million tons to 5.8 million tons over the same period last year.

The bank pointed out that the company plans to increase its paper production capacity by a net of 1.32 million tons by the end of 2027, including the 700,000-ton high-end boxboard paper replacement project in Beihai and 620,000 tons of new production capacity in Dongguan; the pulp sector is still adding 2.5 million tons by the end of 2027, and has approved an additional 600,000 ton pulp line in Taicang, which is expected to be put into operation in the second quarter of 2028. As the self-sufficiency rate of pulp rises, Chairman Zhang Yin said that the company may enter the tissue business with an initial target production capacity of 200,000 to 300,000 tons. Management believes that the profit margin for paper towels is about 400 to 500 yuan per ton.

The bank also pointed out that Zhang Yin revealed that South American forestry assets were purchased in a personal name a few years ago as part of a long-term strategy to build a platform for the entire forestry-pulp-paper industry chain; due to the company's high leverage in the previous capital expenditure cycle, management said that future injections are still possible as the debt ratio declines. The company resumed dividends, with a dividend of 0.1 yuan per share in fiscal year 2026, with a dividend ratio of 13%. The goal is to resume regular dividends from fiscal year 2027 ending at the end of June next year. The dividend ratio is higher than 20%. The debt ratio for FY2026 was 67.6%, and the management target was to reduce it to 50% in FY2027 and 30% in the long term.