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An engineer interested in human behavior and thinking.
  • Where ONP is and will be: A Random Walk in Chinese Paper Industry 4 comments
    Jul 19, 2010 11:41 PM | about stocks: ONP

    ONP has made progress: ONP finally admitted that the Chinese name of its Chinese subsidiary HBOP is the same as that posted by Muddy Waters. Of course, if you don’t know Chinese language, you don’t see ONP’s confession: the HBOP’s Chinese name is on its assets and profits forms filed with local government released to the press.

    Nonetheless, ONP still owes people one explanation: where is the other much smaller paper mill with similar name at the same location.

    But I will not make fuss about it here.

    Nor will I examine the claims of Muddy Waters or ONP, whether it is financial paperwork or equipment price. The real issue is this:

    1)       Does the company making hundreds of tons of paper exist in reality?

    2)       Is this a company worth investing?

    The first question is easy to answer, i.e., to determine whether it is a company in paper or just a company on the paper. Producing 360,000 Tons of paper a year means almost 1,000 tons a day. Just watch

    1)       the number of trucks at factory gate and

    2)       what is on the truck.

    Putting an independent observer there for several months with video or time marked pictures and notarized statements will solve the problem. People in China use private detectives to follow their sweethearts these days, so it is simple. The fact that this is not done yet just tell you something about those in the drama ( or comedy). Bao Ding used to the capital city of He Bei Province which contains two big cities: Beijing and Tianjin. The transportation is good. If I were to let people know the truth, I would just give people information including routes, transportation, hotels and direction to get the company, so that anyone who are worried about their investment (long or short) set up their tents in front of the company gate and see for themselves.

     

    It is the second question I am interested in. To please ONP, let’s just assume that

    1)       the controversy has not happened and

    2)       ONP is as presented on papers, videos and websites.

    Let’s see if it worth investing.

     

    Again I will try to find out myself.

    Actually I started out with the task of trying to help ONP find its other smaller company ONP claimed to exist, but I didn’t find that company. During the search, however, I found many other paper companies, so many of them. After looking at these companies, the big picture of the paper industry in China started to appear.

    When that image emerged, it became clear to me that everyone should know what to do, whatever your position was, long or short. People shouldn’t be divided on long or short. Their positions can change. If it is worth investing, short might become long; otherwise the stock will go down to zero. (Power play is not the focus of this article and will be treated later).

     

    Here is what I have found.

    For those who only know China from English media, no matter what street you live at, Wall Street included, you need a little bit background information. China is ending of its current economic cycle. Each of the last two cycles lasted about ten years. Each cycle started with a development of a group of industries encouraged by government policies and investment and ended with over capacity in these industries. The next cycle will start with new growth points. For example, textiles was one of the large industries in the last cycle, and but was replaced by steel in this cycle. The paper industry is now on the government list of over capacity and reduction.

    We all know about consolidation at the end of capacity expansion. One of the themes you have seen from the Chinese companies listed in US is growth through buying other companies by issuing more shares in stock markets. (US has well-known textbooks cases on such growth: Tyco International, Boston Chicken/Boston Market etc.).

    To answer if ONP is worth investing, we need to address two questions.

     

    The first question is: where is ONP in Chinese paper industry?

    The second is: where will it be?

    When you find where other companies are and then you will find where ONP is (or isn’t, as Muddy Waters claims).

    Again I used Chinese websites to search for answers. (For those who don’t know Chinese language, just look at pictures and compare with those of ONP. And encourage your children to learn a little Chinese language, no matter how hard it is. And talk to schools to hire teachers).

    I entered keywords “中国造纸企业排名”, which means “Enterprise Raking in Chinese Paper Industry”. This is the result: in 2008, there is a list of top 20 companies in paper industry as follows (http://blog.sina.com.cn/s/blog_6249f9460100f442.html).

     

    2008年中国造纸行业20强排行榜

     

    1. 山东晨鸣集团股份有限公司

     

    2. 金东纸业(江苏)有限公司

     

    3. 华泰集团有限公司

     

    4. 山东太阳纸业股份有限公司

     

    5. 山东泉林纸业有限责任公司

     

    6. 山东博汇纸业股份有限公司

     

    7. 湖南泰格林纸集团有限责任公司

     

    8. 东莞玖龙纸业有限公司

     

    9. 金华盛纸业(苏州工业园区)有限公司

     

    10. 山东(临清)银河纸业集团有限公司

     

    11. 芬欧汇川(常熟)纸业有限公司

     

    12. 宁波中华纸业有限公司

     

    13. 东莞理文造纸厂有限公司

     

    14. 山东照东方纸业集团有限公司

     

    15. 漯河市银鸽实业投资股份有限公司

     

    16. 武汉晨鸣汉阳纸业股份有限公司

     

    17. 玖龙纸业(太仓)有限公司

     

    18. 山东华金集团有限公司

     

    19. 珠海经济特区红塔仁恒纸业有限公司

     

    20. 安徽山鹰纸业股份有限公司

     

    (I know some of you must be looking for ONP or its Chinese subsidiary on this list).

    Before we proceed to examine ONP and other companies in the industry, let’s lay out a few things to check with.

    1)       Access to capitals.

    2)       Production lines/equipment. Paper companies would try to increase productivity. This can be achieved by high speed/volume production equipment. Although China has world class factories, the equipment manufacturing is falling behind. The advanced production equipments are imported.

    3)       Scale/volume. This is indication of how effectively its equipment is used or its execution capability.

    4)       Transportation. Water or railways are more cost effective than trucks.

    5)       Employee and R&D. Labor quality is core competence for sustainability.

    6)       Market segments. Market barriers, profit margin and competition vary with different segments and different marketing strategies/channels/networks are needed.

    7)       Brand names. If the market is in China, OEM is not a way of doing business. They have their own brand names in the market.

    8)       Pollution handling. One of reasons to downsize the paper industry in China is pollution. All the companies with foresights handle this issue carefully and have some facilities in place, because the local governments need to show the progress on this front to report to a higher level.

    9)       Power plants for emergency. Production lines run around clock and electricity shortage can happen in China at the height of economic cycles.

    Before going through the list, let’s take a look at ONP (or its HBOP).

     

    ONP.

    1)       Access to Capitals. Wonderful. How can it be a better than a public company listed in US? You have to smile, or laugh (so long as you don’t have money in it).

    2)       Employees. 600. It is unclear how many employees have what degrees with ONP. Normally, companies in China have figures such as the percentage of people with degrees. In China, this matters for low tech industry when you do marketing, hire people or get government funding. As for R&D, no one seems interested.  

    3)       Capacity. 360,000 tons of papers per year (though Muddy Waters unfortunately neither see 8 of its 9 advanced production lines nor 600 employees, which just show how bad their luck is in a populated area with show-off business culture). That means 600 tons per capita. (This is an interesting number we might work on in the future).

    4)       Equipment. Made in China. The major production equipment investment in controversy costs less than $28millions (which Muddy Waters claims having not been spent on the equipment). It is to be noted that the equipment maker is in He Nan Province, one of the agriculture provinces in the middle of China.

    5)       Transportation. Trucks. It’s unclear the transportation teams are owned or leased or handled by other companies.

    6)       Market segments. Extremely competitive. ONE order sizes are large and customers often change. This is rare. Large customers are normally hard to win but stable.

    7)       Brand names. No well-known established brand names.

    8)       Pollution. No facilities seen.

    9)       Power plants. None.

     

    I first picked the No.1 on the listShan Dong Chen Ming(山东晨鸣集团股份有限公司), because our US investors deserve it: the best money should go to the best company. No doubt they wish their pick would someday end up being there. That is a proud ambition, a deep dream and a stirring source for hope. It can even become a faith, until you have learned a little more about what you want to believe in.

     

    Shan Dong Chen Ming(山东晨鸣集团股份有限公司)

    http://baike.baidu.com/view/1633461.htm

    (You can check many more websites than this one, as you please, with the same Chinese keywords using Baidu or Google).

    1.       Access to capitals. One of the few companies listed in China on all A , B and H share stock markets. (A share is listed in China for domestic investors, B for foreigners and H is listed in Hong Kong). Assets over 20 Billions RMB. One of top 500 enterprise in China, one of the top 50 in paper industry in the world.

    2.       Employee and R&D. More than 16000, about 3000 with college degrees. The corporate R&D center of over 600 people consists of 7 research departments, 8 labs and noticeably a post-doctoral research station, which indicates its advanced level of research facilities.

    3.       Equipment/production lines. World class production lines and numerous imported equipment in production and R&D. (Will use a subsidiary as example below).

    4.       Scale. It has more than 10 subsidiaries in many provinces including some foreign joint ventures. Annual output of 4millions tons of paper and pulp. It has remained the number one in Chinese paper industry for more than 12 years .

    5.       Market and brand names. Products range from copper plate paper (used for art paper such as magazine) to corrugated paper (used for board carton), with brand names and markets in 50 countries worldwide including US and Japan, in addition to domestic markets. “晨鸣is its registered trademark.

     

    In order to get more detailed information, I checked its subsidiaries. This is one of them. Let’s see how it has grown.

     

    No. 1.山东晨鸣纸业集团齐河板纸有限责任公司(简称齐河晨鸣)

    http://baike.baidu.com/view/1633465.htm?fr=ala0_1_1

    Qi He Chen Ming is Shang Dong Chen Ming’s home before it became a large corporate. This is what it was like in 1990s. It was then in the corrugated paper (used for board carton) business as ONP does (or not, as Muddy Water claims) now.

    1)       Assets. 1.35 Billions RMB.

    2)       Employees. 2000.

    3)       Scale. Annual capacity of 500,000 tons.

    4)       Equipment. 5 production lines imported from US, Finland and Germany with complete waste paper processing capability ( I guess this means not much smoke or steam in workshop as seen at ONP).

     

    http://www.qhccoo.cn/zhaos/ZdxmShow.asp?id=25426

    By 2004, it had achieved the following.

    1)       Employees. 3000.

    2)       Revenue. 1.2 Billion RMB.

    3)       Paid tax or profits taken away by the state. 200 millions RMB.

    4)       Facility. Has its own power plants and pollution processing plants.

    When you look at the information about Chen Ming, how would you feel? Reality sets in.

    If the No.1 seems hard to beat, maybe we should look at the next.

     

    No.2 Gold East Paper金东纸业(江苏)有限公司

    http://www.goldeastpaper.com/Index.aspx

    http://www.goldeastpaper.com.cn/info.htm#

    http://gsxy.znufe.edu.cn/Article/2009-4/2009413171021153.html

    1.       Capitals. Joint venture. Registration capital over 60 Billion RMB. The largest specialized Art paper producer in the world.

    2.       Employee and R&D. More than 5000, over 45% with college degrees, 1.5% with master degrees and a few Ph.D.s.

    3.       Equipment/production lines. 3 wood-free production lines among others imported from Finland and Germany.

    4.       Scale. Over 2.2millions tons of capacity.

    5.       Market and brand names. Well-known established brand names worldwide with 37% of market share in China.

    6.       Facilities. Two 20,000 ton-class docks, power plants and pollution processing plants.

    This is still a world ONP doesn’t belong to. It seems a waste of time to go down the list one by one, so let’s jump all the way down to the last one on the list to see how lucky we might be.

     

    No. 20 An Hui Shan Ying安徽山鹰纸业股份有限公司

    http://shanyingpaper.com/

    http://shanyingpaper.com/aboutus.asp?menuID=jssl

    http://www.docin.com/p-4163255.html

     

    1.       Access to capitals. Listed on China stock market in A shares in 2001.

    2.       Employees. More than 1300.

    3.       Equipment/production lines. Imported from USA, Norway and France with investment of 300 Millions RMB.

    4.       Scale. Annual capacity of 820,000 tons. The largest in An Hui province with quite a few subsidiaries in other rich provinces.

    5.       Facilities. Docks, railways, power plants and pollution processing plants.

    6.       Market. Mainly in corrugated paper and board carton.

    7.       Brand name. “山鹰”.

     

    If ONP doesn’t belong to the “country club” of Chinese paper industry, how about local fame? I searched for the paper mills in Hebei Province, where ONP is in. Here is a list.

    http://www.cx0.cn/category-12-36-1.html.

    There are nearly 200 items on the list, representing cities/districts/counties in the province. (There are 30 provinces in China). Under each item, there are some paper mills information in that area. I don’t know how many of those companies are still alive and will be.

    I made a brief search under Bao Ding city, where ONP’s HBOP is. It is not there. There are other paper mills, though.

    I am not saying this is the evidence whether ONP exists or not. Nor I am saying anything about the authority or completeness of this list. It just gives you a feeling what the big picture looks like in China paper industry. Just entering “东方纸业” (ONP’s Chinese name) in a Baidu search, you will see several companies whose names contain “东方纸业” in different provinces or cities, which have nothing to do with ONP.

    During my search, the above companies often have news on websites, whether it is new product release, quarter reports, starting new production lines, lab development, standards qualification or pollution controversies. But it is odd there is little such information available for ONP or HBOP. The most frequent appearance is its IPO in USA (which, I know, we are so proud of). ONP’s business visibility have been unbelievably low in China, until now, when this controversy shows up.

    Note that paper is not high-tech industry where a start-up can spend years in R&D without much marketing activities. Nor is ONP a service or contract company attached to certain government institutions/big corporations where a few stable customers are all it needs. ONP customers are few and often change. Its order sizes are large. This is hard to understand especially when you realize Chinese business people are conservative. They trust brand names.

    After looking at all this information, it reminds me of a psychological fact: when you look at a tiny thing long enough, it looks much bigger. If you have never been to a beach, every broken shell looks wonderful, and even sands are so lovely.

    Now it seems we can answer the question: where is ONP in Chinese paper industry?

    You will naturally wonder: if ONP is (or isn’t, as Muddy Water claims) just one of the thousands of unknown paper mills in China, why should you put your money in it?

     

    Now we come to the second question: where will ONP be? Where is its future?

    Digital Photo Papers.

    One of its promoters said,

    1)       there are only two or three companies in digital photo papers in China and ONP is one of them (or to be one of them).

    2)       the market potential is large.

    If so, there will be hope for heroic American investors : a Silicon Valley type of story (without R&D?).

     

    But if you have the patience to read this far, if you are surprised by the strength of the top ranking paper companies in China shown here, if you remember what you had expected before 2008 Beijing Olympic Game and how you felt when you actually watched its open ceremony, you should be ready for a surprise again.

     

    The US digital photo paper market is shared by traditional film, camera and printer makers such as Kodak, Fuji, HP and Cannon, indicating its technology and market barrier in its early phase. These are well known brand names. How about China?

    It turns out there is a traditional film maker in China, called Lucky Film 乐凯. And it is located in Bao Ding, He Bei province. (That’s right, ONP must have known its big neighbor).

    http://www.luckyfilm.com/index.php

    http://baike.baidu.com/view/45112.htm?fr=ala0_1_1

    http://www.cpp114.com/news/newsShow_98058.htm

    Lucky Film was started in 1950s and had dominated Chinese film market until Kodak and Fuji entered China in 1980s. Because of its history, it has strong R&D. It not only has Ph.D.s, but also a fellow of Chinese Academy of Engineering. Lucky Film had developed its own digital photo papers by 2004 and taken 30% of the market share by 2008. One of its subsidiary is listed on Chinese stock market.

    Is this the competitor ONP will take on? Or the following.

    Here I found an analysis on Chinese digital photo paper market.

    http://www.joyher.cn/9940.html.

    By 2009, the digital photo paper industry had over 500 companies, more than 280,000 employees, nearly 1 billion RMB in assets and about 4.5billions RMB in sales. (Note that most of them can’t be producers). The industry growth rate went down from 2008 to 2009 in terms of sales, employment and number of companies. You can pay a few thousands RMB for a detailed report. Here is another market analysis with projection until 2012.

    http://www.hjbaogao.com.cn/Article/HTML/659296.shtml.

     

    Note that if this is a market with great potentials without high technological barrier, any of those top ranking paper companies can buy production lines and jump into it very quickly. There are no barriers for them: capital, labor or marketing channels. ONP has no tricks that they don’t know of (esp. growth through merging and issuing more stocks).

     

    Or maybe there is just one trick they also know but would rather not use because it is too risky.

     

    After all that have happened, it should remind you the ending in the movie “ Vanilla Sky”: after all those nightmares, at the end of sky diving, are you hearing the whisper?  

    …Wake Up…

    …Wake Up…

    …Wake Up…

    ………………….

    石家庄纸业公司 (纸业公司 means paper company)

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    饶阳纸业公司

    安平纸业公司

    故城纸业公司

    景县纸业公司

    阜城纸业公司

    …….

    …….

    …….



    Disclosure: Used to be long and then turned into short

    Disclosure: Used to be long and then turned into short
    Stocks: ONP
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Comments (4)
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  • It is unfortunate that more people won't appreciate the effort you have expended. Muddy Waters accusations struck so many people as being wrong because so much was out of context. The huge contribution you are making is to provide some necessary context.

     

    We immediately have the confirmation that ONP's denials based on the "wrong company" theory were lies. Your top twenty list and chinese character search strings provide vast opportunities to make rational comparisons. What amazes me is that the long position continues to have only the word of ONP to support their side of the debate. 2009 revenue claims by ONP are massively exaggerated and this company will drop back below 50 cents.

     

    John
    20 Jul 2010, 09:12 AM Reply Like
  • Author’s reply » Thanks. In the beginning, the truth is with the few. Comparing those who just found the earth was not flat, shorts today are much luckier in that they don't get burned. One can be both right and hated, and only becomes being loved after death. (How much love is shown depends on how miserably one dies, e.g. murder, burning etc).
    21 Jul 2010, 12:37 PM Reply Like
  • So, your conclusion is that ONP is a fraud because there are many larger paper companies in China??? What does that have to do with ONP's financial statements?

     

    This is just another worthless article from an ONP short seller.
    21 Jul 2010, 03:56 PM Reply Like
  • Can't an "engineer interested in human behavior and thinking" proofread the first sentence of an article?

     

    It's Muddy Waters, not Muddy Water. Because of the typo, obviously this article is fraudulent.
    21 Jul 2010, 04:23 PM Reply Like
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