Zheshang Securities has issued a research report reiterating its "Buy" rating on ND PAPER (HKEX: 02689). The report factors in the anticipated savings in financial expenses from the company's repurchase of its perpetual bond and the improving industry conditions for containerboard and corrugated paper. It forecasts the company's revenue for FY2026 to FY2028 to be 72.7/74.0/74.8 billion yuan, representing increases of 15%, 2%, and 1% respectively. Net profit attributable to shareholders is projected to reach 3.5/4.3/5.0 billion yuan, with growth rates of 99%, 23%, and 15% respectively.
Key Points from the Report
The company has initiated a tender offer to repurchase all outstanding $400 million of its 14.00% coupon rate perpetual capital securities in cash. This move aims to optimize the capital structure and enhance profitability. The funding for the repurchase will come from a 3-year syndicated loan of 2.0 billion yuan approved in June 2026 and the company's internal resources.
Financial and Strategic Impact of the Repurchase
The repurchase is expected to significantly improve the company's financial position, directly boosting profits and demonstrating management's confidence.
The action will lead to substantial savings in financial expenses. The perpetual bond carries a high coupon rate of 14.00%. Given the current interest rate environment, the new 2.0 billion yuan syndicated loan is expected to have a lower rate. In FY2025, this perpetual bond incurred expenses of approximately 400 million yuan. Full redemption is anticipated to notably reduce the company's interest expense burden.
Management's commitment is evident. The controlling shareholder, Ms. Zhang Yin and her family, collectively hold about 81% of the outstanding principal of this perpetual bond. They have committed to tender their holdings after the early bird period at the general repurchase price, voluntarily forgoing a 7% premium. This decision saves the company approximately $22.68 million in premium interest, aligning management's interests closely with the company's and reflecting confidence in its future.
The capital structure will be optimized upon completion, as the repurchased securities will be cancelled and will no longer be outstanding.
Industry Cycle and Company Positioning
The pulp-based paper segment appears to be bottoming out, while the containerboard and corrugated paper sector is entering an upward cycle, where the leading player's earnings leverage becomes prominent.
For uncoated woodfree paper & coated ivory board, current prices are at historical lows. As of June 5th, prices for uncoated woodfree paper were 4,600 yuan/ton (0th percentile historically), and coated ivory board was 4,018 yuan/ton (3rd percentile). Recent price increases have followed the trend in containerboard. Overall, profitability in the pulp-based paper segment is at a historical low, with theoretical gross margins for uncoated woodfree/coated ivory board at -10%/-9% as of June 5th. With limited room for further price declines and pulp prices softening, the cycle bottom for this segment is becoming more solid.
For containerboard & corrugated paper, recent factors such as rainfall affecting waste paper recovery, rising imported waste paper prices, and the release of export orders have driven up waste paper costs, leading to off-season price hikes for paper. Current tracked prices for containerboard/corrugated paper are 3,700/2,981 yuan/ton, at the 31st/44th historical percentiles respectively. The rapid implementation of price increases, combined with ND PAPER's large production scale, highlights the significant profit leverage from these hikes.
Cost Advantages and Capital Expenditure Trends
The company continues to advance its pulp-paper integration strategy, deepening its cost advantage. Meanwhile, the peak in capital expenditure has passed, paving the way for sustained earnings leverage. As of H1 FY2026, the company's operational wood pulp design capacity is approximately 6.1 million tons annually. An additional 2.5 million tons of pulp capacity is planned, expected to commence operation from late 2026 through 2027. Upon completion of all projects, the total annual design capacity for fiber raw materials is projected to reach about 10.7 million tons. A high self-sufficiency rate in pulp will continue to optimize production costs. The company currently has no plans for new papermaking capacity expansions. Future investments will focus on the upstream pulp sector. With capital expenditure past its peak, it is expected to decline marginally going forward, thereby improving the company's cash flow position.
Risk Factors to Consider
Potential risks include fluctuations in raw material prices, intensifying market competition, and weaker-than-expected downstream demand.