VAYUE.com

Highlights.Revenue went up 36.4% in FY12/08A to HK$2,424.0m due to: 1) volume gain backed by capacity expansion to 300,000 tonnes at year end from 240,000 tonnes one year ago; 2) rise in selling price (~5% in Jun 2008) to pass on incremental pulp cost. Gross margin improved slightly by 0.6pcp to 21.2%. Selling and marketing costs increased by merely 3.8% during the period thanks to the scale effect, more stringent sales management as well as the adoption of commercial discount settlement method. Financial costs dropped from HK$28.1m to HK$25.2m. Consequently, net margin enhanced 2.4pcp to 6.8%, leveraging bottom line up 111.7% to HK$165.9m. The management proposed a final dividend of HK$0.022 per share

Our view. The actual net profit is 20.6% ahead of market consensus (RMB137.5m) or 4.3% higher than the highest estimate (RMB159m), which might trigger a moderate re-rating in short-term. We are optimistic on the company’s performance in 2009 given: 1) demand for household paper products is relatively inelastic and should be minimally affected by the economy slowdown; 2) the steep drop in wood pulp price will reduce the company’s production cost apparently.

Valuation. The counter is trading at 19.6x FY12/08A P/E, representing a 21.4% discount to Hengan (1044 HK, HK$29.20, HOLD).