Orient Paper Inc (ONP) is a name that may seem quite familiar to investors. The leading producer of paper products in northern China was the subject of negative press and fraud reports dating back to 2010. Research from Muddy Waters LCC originally suggested that ONP had been overstating 2008 revenue by 27 times and 2009 revenues by 40 times. Additionally Muddy Water's research suggested that Orient Paper had been overstating the value of their production facilities, as well as overstating inventory turnovers. A whirlwind saga of mud slinging (no pun intended) between parties ensued, resulting in a class action lawsuit by shareholders in 2010. During this time investors watched share prices plummet from a high of over $15.00 in fall 2010 a share to a low of 1.66 within the last year. Presently shares are trading at just under $1.80 and I believe they present a respectable opportunity for investors.
Value for Investors
Orient Paper initiated a quarterly dividend starting in the second quarter of 2012. The annualized dividend of 5 cents per share or .0125 cents per quarter, works out to be about 2.8%. Management has state its intentions to make the dividend payment recurring. While not the best of the dividend payers, a 2.8% return does provide a slight incentive for investors.
The company recently reported strong revenues from an otherwise down year for the Chinese paper industry. A new record quarterly revenue of $43.5 million was reported within the annual report. The record is the result of the installation of a new corrugating medium paper production line (CPM). This represents an 11.9% increase in revenues from 38.9 million year over year. Sales volume improved by 154% after the installation of the new line. Management believes this new line will allow the sales growth to continue into 2013.
In January the company agreed on lease terms for a new 200,000 square meters tissue paper production facility. The facility will include two production lines and generate 30 to 34 million in revenue annually for the company.
Gross profits fell in 2012 from 8.4 million to 6.7 million. This was a result of sluggish paper sales within China and a tightened government fist with regards to environmental protection. However management believes that the new CPM line and an increased demand for paper products near the end of 2012 will position the company for a strong 2013.
While investors should be slighty leery about any small cap Chinese company that reverse merges its way onto an American exchange, one can feel more at ease when looking at Orient Paper Inc. Orient Paper has proven that the limitations imposed by the Chinese Government over deforestation and environmental issues have not stopped the company from reaching success. The company has acknowledged that restrictions imposed by the government may impact the Chinese paper industry as a whole. However increased production and sales from the new CPM production facilities should help to negate any negative governmental change. China remains a growing economic powerhouse and Orient Paper could serve as safe exposure for American investors.
Additional disclosure: One should perform their own due diligence before finalizing investment decisions.