UBS has issued a research report stating that ND PAPER (02689) saw its share price decline yesterday following its positive profit alert. After discussions with investors, the bank noted that some mainland investors had originally expected earnings to be approximately 10% higher than the guidance provided, leading them to view the results as disappointing, even though the reported earnings were broadly in line with market consensus.

At the current share price, ND PAPER is trading at a forecast price-to-earnings ratio of 5.3 times and a price-to-book ratio of 0.5 times for the fiscal year 2027 ending June 30 next year. UBS has maintained its 'Buy' rating and raised its net profit forecast for fiscal 2027 by 9% to RMB 5 billion, reflecting a stable outlook and the redemption of perpetual securities. The target price has been increased by 9%, from HK$10.80 to HK$11.82.

UBS noted that ND PAPER issued a profit alert, expecting full-year net profit for fiscal 2026 ending June 30 to range between RMB 3.4 billion and RMB 3.6 billion, representing a year-on-year increase of 92% to 104%, with a midpoint of RMB 3.5 billion, which is broadly in line with both UBS and market expectations. It is worth noting that ND PAPER's net profit has already doubled from RMB 751 million in fiscal 2024 to RMB 1.767 billion in fiscal 2025, and is poised to double again in fiscal 2026 despite a downturn in industry profitability.

Management attributes the strong earnings growth to higher sales volumes, as well as a widening gap between product price increases and raw material cost inflation. UBS pointed out that ND PAPER's sales volume and profit margins continue to improve. Supported by robust paper demand, the bank estimates that its paper sales volume will increase by 13% year-on-year to 24.4 million tonnes in fiscal 2026. Although the industry's weighted average profitability is expected to decline by approximately RMB 150 per tonne year-on-year, UBS estimates that ND PAPER's gross profit per tonne will expand by around RMB 90, driving its gross margin up by 3 percentage points year-on-year to 14%.

The bank believes that ND PAPER's vertically integrated pulp and paper platform has driven gross margin expansion through lower costs and enhanced pricing power. Additionally, the company redeemed US$400 million in perpetual securities bearing an annual interest rate of 14% in August, which is expected to generate annual savings of approximately RMB 400 million starting from fiscal 2027.