Lee & Man Paper Manufacturing Ltd said that it will expand into higher margins paper products and implement stringent cost control programs as the mainland paper package market is clouded by short-term excess capacity and uncertain market demand.

The paper package manufacturer announced that, for the six months ended Sept 30, its interim net profit jumped 4.3 percent to HK$674 million ($87 million) compared to a year ago. The companies declared an interim dividend hike of 4.2 percent to HK$0.05 a share.

Due to the coal price reduction and strict cost control programs, the company was able to make an interim profit despite a slump in revenues. Sales declined 1.9 percent to HK$7.2 billion compared to a year earlier despite a 15 percent containerboard sales volume growth to 2 million tons. The company's overall profit margin rose 0.54 percentage point to 9.33 percent over the period.

Lee & Man Paper's share price surged 11.1 percent to HK$4.2 per share on Tuesday due to its better-than-expected result.

Lee & Man Paper Chief Executive Officer Raymond Lee said that he is not sure whether the market demand will recover in the next few months, adding that the nation's new leadership may unveil new economic stimulus measures probably in March next year, meaning that there will be a few months policy vacuum period.

In addition, Lee said that the mainland paper package market is still clouded by excess capacity and this is particularly clear in those south-eastern provinces.

Despite the excess capacity issue, Li & Man will open two new production lines in Jiangxi province and Vietnam as previously scheduled that will raise the company's total capacity to 6.8 million tons per year starting in 2013. The company estimated that its containerboard paper sales volume can reach 4.7 million tons in 2013.

"The company will execute stringent cost control programs to become the lowest cost producer on the mainland," Lee reckoned.

Lee & Man Paper will be cautious in making further capital expenditure (capex) in the near future, Lee said. He said that the company's capex plan in 2013 and 2014 will amount to HK$1.2 billion and HK$900 million, respectively; and these plans will be funded primarily by operating cash flows.

The company managed to maintain its net gearing ratio of 65 percent, the same ratio when the company announced its annual results in March this year.

In addition to cost control, the company will diversify into higher margins products such as coated duplex board which is expected to account for 8 to 9 percent of the company sales volume by the end of December 2013.

"Our partnership with the Japanese Nippon Paper can help us diversifying into coated duplex board paper products. We believe this new product line will elevate the company's overall profit margin ratio," Lee said.

"The company is riding on the right business track of cost control and product diversification," Kingston Securities Research Director Dickie Wong told China Daily. "The selling price of paper package products has stabilized and it should support the company's profit performance."

A Citibank research report expected that Lee & Man Paper's net profit can jump 8 percent as it can raise the selling price of its paper package products.

oswald@chinadailyhk.com