Citi has released a research report upgrading LEE & MAN PAPER's (02314) investment rating from "Sell" to "Buy," while significantly raising its target price by 75% from HK$2.4 to HK$4.2. This adjustment is primarily based on the judgment that the profit cycle of the paper industry has bottomed out and is gradually improving; LEE & MAN PAPER's current price, equivalent to a forward price-to-earnings ratio of 8 times and offering a 4.2% dividend yield, presents attractive valuation.

The report notes that although LEE & MAN PAPER's own profit growth may not match that of its peer Nine Dragons Paper (02689), the recent profit warning issued by Nine Dragons Paper sends a key signal that the overall profitability of the paper industry is not expected to deteriorate further in the second half of 2025 compared to the first half. Citi analysts therefore believe the most challenging period for industry profits may be over, with moderate improvements expected ahead.

From a business perspective, the report suggests LEE & MAN PAPER's profit recovery will be mainly driven by a rebound in profit margins for its containerboard and tissue paper businesses. Citi forecasts that, benefiting from a strong rebound in margins for these two core products, LEE & MAN PAPER's gross profit margin will show an improvement trend similar to its peers: it is expected to expand significantly by 4.3 percentage points year-on-year in the second half of 2025, and by 1.1 percentage points compared to the first half.

Simultaneously, sales are also expected to resume growth, with second-half 2025 sales forecast to rise 5.9% year-on-year to approximately HK$14.288 billion, reversing the decline recorded in the first half due to falling average product prices. The report also mentions that LEE & MAN PAPER is expected to announce its full-year 2025 results in early March 2026, which could serve as a near-term positive catalyst for the share price.

However, Citi's top pick in the paper sector remains Nine Dragons Paper, due to its stronger vertical integration capabilities across the upstream and downstream segments, allowing for more effective cost control.