In less than three years, Cheung Yan, the founder of Nine Dragons Paper (Holdings), has seen her world swing from one extreme to the other.
In 2006, Ms Cheung, who heads the mainland’s largest containerboard maker, made the top of the China rich list compiled by the Hurun Report, as her company prospered from recycling waste paper into container paper used to package goods.
However, her company has been dogged by media speculation that it faces bankruptcy - which the company has denied.
Analysts now say the company has escaped collapse, but is confronted with heavy debt and shrinking profits.
Bocom International analyst Christian Jiang Weisong said Beijing’s measures to help small and medium-sized enterprises survive the financial crisis meant that downstream packaging companies would be saved and suppliers such as Nine Dragons would survive.
“If Nine Dragons is to go bankrupt, it will be a big blow to the past 30 years of reform and investor confidence in the Chinese economy. State-owned banks will realise a lot of bad debts, too,” Mr. Jiang said.
The company obtained an additional 2 billion yuan (HK$2.27 billion) in credit facilities from mainland banks in the second half of last year, according to a Fitch Ratings report.
Yet the company’s troubles are not over.
This week, Nine Dragons warned that net profit for the last six months of 2008 would suffer a substantial decline, due to lower selling prices and rising raw materials costs.
Fitch cut its foreign currency issuer default rating and US$300 million in notes from BBB-minus (investment grade) to BB-plus (non-investment grade) in October last year, and further to BB-minus and its US$300 million notes to B-plus respectively last month.
Similarly, Standard & Poor’s downgraded the company’s long-term corporate credit rating and US$300 million in notes from BBB-minus in October to BB-minus last month.
Ms Cheung dismissed the downgrades, saying: “Many companies were downgraded in the global credit crisis ... our financial position remains healthy.”
Standard & Poor’s downgrade of Nine Dragons’ US$300 million notes last month raised the interest rate from 7.875 per cent to above 9 per cent. The domestic benchmark five-year lending rate was below 6 per cent, according to Citi analyst Clement Wong.
By late December last year, Nine Dragons had bought back US$16.25 million of the notes, and prepaid US$100 million of a US$350 million syndicated loan and HK$$720 million of a HK$2.3 billion loan.
“What concerned us even more was that the management of Nine Dragons said [in October 2008] they would pay 1.2 billion to 1.5 billion yuan of debt earlier than the repayment schedule, to show their confidence in their business outlook,” said Mr. Jiang.
“No listed company would be willing to pay off debt before it’s due. It is not usual practice even when business sentiment is normal. Nine Dragons’ financial health is very poor, considering that at the end of June 2008 it had 1.6 billion yuan in cash versus short-term debt of 2.3 billion yuan and long-term debt of 12.4 billion.”
The company’s debt-equity ratio had more than doubled to 98.9 per cent by June 30 last year from 42.4 per cent a year earlier, thanks to its aggressive expansion.
When it listed in Hong Kong in March 2006, its production capacity was less than Hong Kong-listed containerboard rival Lee & Man Paper Manufacturing. Now, annual capacity is 6.8 million tonnes, nearly twice that of Lee & Man, making it the second-largest in the world behind United States-based International Paper.
The price of such lofty ambitions is massive capital expenditure and heavy debt. Nine Dragons’ capital expenditure nearly doubled from 5.3 billion yuan in fiscal 2007 to 9.4 billion yuan in fiscal 2008.
In its latest annual report, Nine Dragons said it had reduced its planned capital expenditure for this fiscal year from 3 billion yuan to 2.2 billion yuan, and would delay some expansion plans to 2010 or later.
However, Mr. Wong said the company’s net gearing ratio would likely rise to about 100 per cent, and its net debt increase to 14.5 billion yuan this year, from 12.7 billion yuan last year.
An analyst at a major US financial institution added to the bleak outlook. “We see a lot of downside to its management’s guidance. In the first half of 2008, they did a lot of acquisitions, installed lots of machines. Then in the second half of 2008, the market deteriorated real fast. Yet management remained super-bullish until the third and fourth quarter last year, when it started reporting ugly figures,” said the analyst.
Nine Dragons posted a 6.3 per cent drop in net profit to 1.88 billion yuan for fiscal 2008, despite a 43.5 per cent rise in revenue to 14.11 billion yuan.
Its share price has collapsed from a peak of HK$26.25 on September 19, 2007, to HK$1.86 yesterday.
As a result, Ms Cheung and her husband, deputy chairman Liu Ming-chung, who together hold about 72 per cent of the company, saw the value of their holdings plunge from HK$81.4 billion to HK$5.1 billion.
However, Mr. Jiang acknowledged Ms Cheung’s contribution in making the company one of the world’s leading paper manufacturers.
“A pioneer in using waste paper to manufacture packaging paper, she has contributed greatly to saving resources and recycling waste.
“However, Nine Dragons’ growth has left numerous problems for her and her team to solve, but I don’t think it’s too late yet,” he said.
1 comment:
Fortunes Change for Nine Dragons
Firm under pressure after aggressive expansion
Toh Han Shih
17 January 2009
In less than three years, Cheung Yan, the founder of Nine Dragons Paper (Holdings), has seen her world swing from one extreme to the other.
In 2006, Ms Cheung, who heads the mainland’s largest containerboard maker, made the top of the China rich list compiled by the Hurun Report, as her company prospered from recycling waste paper into container paper used to package goods.
However, her company has been dogged by media speculation that it faces bankruptcy - which the company has denied.
Analysts now say the company has escaped collapse, but is confronted with heavy debt and shrinking profits.
Bocom International analyst Christian Jiang Weisong said Beijing’s measures to help small and medium-sized enterprises survive the financial crisis meant that downstream packaging companies would be saved and suppliers such as Nine Dragons would survive.
“If Nine Dragons is to go bankrupt, it will be a big blow to the past 30 years of reform and investor confidence in the Chinese economy. State-owned banks will realise a lot of bad debts, too,” Mr. Jiang said.
The company obtained an additional 2 billion yuan (HK$2.27 billion) in credit facilities from mainland banks in the second half of last year, according to a Fitch Ratings report.
Yet the company’s troubles are not over.
This week, Nine Dragons warned that net profit for the last six months of 2008 would suffer a substantial decline, due to lower selling prices and rising raw materials costs.
Fitch cut its foreign currency issuer default rating and US$300 million in notes from BBB-minus (investment grade) to BB-plus (non-investment grade) in October last year, and further to BB-minus and its US$300 million notes to B-plus respectively last month.
Similarly, Standard & Poor’s downgraded the company’s long-term corporate credit rating and US$300 million in notes from BBB-minus in October to BB-minus last month.
Ms Cheung dismissed the downgrades, saying: “Many companies were downgraded in the global credit crisis ... our financial position remains healthy.”
Standard & Poor’s downgrade of Nine Dragons’ US$300 million notes last month raised the interest rate from 7.875 per cent to above 9 per cent. The domestic benchmark five-year lending rate was below 6 per cent, according to Citi analyst Clement Wong.
By late December last year, Nine Dragons had bought back US$16.25 million of the notes, and prepaid US$100 million of a US$350 million syndicated loan and HK$$720 million of a HK$2.3 billion loan.
“What concerned us even more was that the management of Nine Dragons said [in October 2008] they would pay 1.2 billion to 1.5 billion yuan of debt earlier than the repayment schedule, to show their confidence in their business outlook,” said Mr. Jiang.
“No listed company would be willing to pay off debt before it’s due. It is not usual practice even when business sentiment is normal. Nine Dragons’ financial health is very poor, considering that at the end of June 2008 it had 1.6 billion yuan in cash versus short-term debt of 2.3 billion yuan and long-term debt of 12.4 billion.”
The company’s debt-equity ratio had more than doubled to 98.9 per cent by June 30 last year from 42.4 per cent a year earlier, thanks to its aggressive expansion.
When it listed in Hong Kong in March 2006, its production capacity was less than Hong Kong-listed containerboard rival Lee & Man Paper Manufacturing. Now, annual capacity is 6.8 million tonnes, nearly twice that of Lee & Man, making it the second-largest in the world behind United States-based International Paper.
The price of such lofty ambitions is massive capital expenditure and heavy debt. Nine Dragons’ capital expenditure nearly doubled from 5.3 billion yuan in fiscal 2007 to 9.4 billion yuan in fiscal 2008.
In its latest annual report, Nine Dragons said it had reduced its planned capital expenditure for this fiscal year from 3 billion yuan to 2.2 billion yuan, and would delay some expansion plans to 2010 or later.
However, Mr. Wong said the company’s net gearing ratio would likely rise to about 100 per cent, and its net debt increase to 14.5 billion yuan this year, from 12.7 billion yuan last year.
An analyst at a major US financial institution added to the bleak outlook. “We see a lot of downside to its management’s guidance. In the first half of 2008, they did a lot of acquisitions, installed lots of machines. Then in the second half of 2008, the market deteriorated real fast. Yet management remained super-bullish until the third and fourth quarter last year, when it started reporting ugly figures,” said the analyst.
Nine Dragons posted a 6.3 per cent drop in net profit to 1.88 billion yuan for fiscal 2008, despite a 43.5 per cent rise in revenue to 14.11 billion yuan.
Its share price has collapsed from a peak of HK$26.25 on September 19, 2007, to HK$1.86 yesterday.
As a result, Ms Cheung and her husband, deputy chairman Liu Ming-chung, who together hold about 72 per cent of the company, saw the value of their holdings plunge from HK$81.4 billion to HK$5.1 billion.
However, Mr. Jiang acknowledged Ms Cheung’s contribution in making the company one of the world’s leading paper manufacturers.
“A pioneer in using waste paper to manufacture packaging paper, she has contributed greatly to saving resources and recycling waste.
“However, Nine Dragons’ growth has left numerous problems for her and her team to solve, but I don’t think it’s too late yet,” he said.
Post a Comment