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Orient Paper: A hidden gem

Orient Paper Inc. ONP has dropped precipitously the past few days, despite the fact that Muddywaters, LLC has withdrawn their allegations last Friday, after ONP had denied categorically and repeatedly any wrongdoings and provided many documents and links to prove their numbers were accurate. The reason for the continued drop may be attributed to a few articles by short sellers who have managed to published their opinions as news and facts, scaring investors into selling their shares.  In addition, several law firms have started investigation into ONP.  These law firms, however, have offered no evidence of ONP's wrongdoings other than Muddywaters's withdrawn allegations.  When some of these law firms were contacted, they clarified that they were just conducting an investigation into Muddywaters's allegations, and there were no lawsuits yet.  Though there were so many law firms trying hard to find wrongdoings so that they can make money suing, none has found anything other than Muddywaters's withdrawn allegations.  This further suggests that ONP has done nothing wrong.

On August 3, 2010, ONP voluntarily engaged the Big-4 Deloitte to bring additional credibility and reassure investors. This act alone suggests that ONP has nothing to hide, for Deloitte would never work with any small cap company with even a hint of fraud, but investors will have to wait for the final Deloitte's outcome.  Moreover, the CEO has never sold a single share and has even lent money to ONP, proving that he totally believes in ONP and its rapid growth potential. 

At the current level, ONP's stock has already factored in the worst case scenario, trading below sales and around book values.  Therefore, the stock price will likely have nowhere to go but up the next few weeks, albeit gradually.  ONP is also expected to release earning in a next few days. The question now is what is the right valuation after ONP has been badly beaten down by the panicked investors.  In this article, I will compare ONP with other comparable paper and paper products companies in an attempt to come up with a reasonable valuation for ONP.

Below is the list of the top paper and paper products companies both in China and around the world:

Company

P/E

Mkt Cap

Current ratio

Net profit margin

EBITD margin

Revenue

Employees

Orient Paper Inc

4.96

95.90M

1.75

12.45

21.06

102.14

600

CHINA:

 

 

 

 

 

 

 

Shandong Huatai Paper Co Limited

5.79

6.49B

0.67

18.74

16.77

5,827.56

8,372

Shan Dong Sun Paper Idty Jt Stk Co

17.87

10.51B

0.66

9.92

18.73

5,960.73

6,267

Henan Yinge Industrial Investment Co

72.03

5.36B

1.02

1.96

9.36

2,341.95

4,773

Yueyang Paper Co.,Ltd.

45.11

5.16B

0.86

3.09

14.82

3,038.54

4,683

Guangxi Guitang (Group) Co

41.75

2.78B

0.99

2.75

10.18

1,082.16

2,731

Shandong Chenming Paper Holdings

9.73

11.90B

1.49

6.41

17.01

17,079.97

16,291

MCC Meili Paper Industry Co

107.8

1.76B

0.79

1.08

19

1,001.36

4,010

Shandong Bohui Paper Industry Co

19.44

3.84B

1.24

7.13

17.66

3,122.46

5,452

 

 

 

 

 

 

 

 

INTERNATIONAL:

 

 

 

 

 

 

 

Domtar Corp. (NYSE:USA)

5.76

2.37B

2.86

5.67

18.83

5,465.00

10,000

Boise Inc.

3.51

499.24M

1.94

7.78

19.9

1,978.19

4,100

P.H. Glatfelter Company

4.91

545.74M

2.79

10.31

18.51

1,197.34

3,546

Wausau Paper Corp.

15.7

388.23M

1.68

1.99

11.55

1,032.14

2,300

Neenah Paper, Inc.

47.39

274.93M

1.72

-0.31

8.42

573.9

1,700

Victoria PLC

27.95

15.28M

1.91

1

7.2

62.97

654

UPM-Kymmene Corp. (ADR)

14.08

7.20B

1.92

2.18

12.75

10,070.54

22,840

International Paper Co.

43.78

10.91B

1.88

3.12

14.29

23,366.00

56,100

Stora Enso OYJ (ADR)

 

6.21B

1.43

-9.82

-1.86

11,599.54

27,000

Hadera Paper Ltd.

13.73

342.27M

1.09

10.29

8.5

231.61

3,167

 

Based on the table, ONP has one of the lowest price-per-earning P/E ratio at 4.96, while its high net profit margin is second only to Shandong Huatai Paper Co. and is comparable to P. H. Glatfelter Company and Hadera Paper Ltd.  If ONP’s severely depressed current P/E ratio is to be corrected back to the average 27.85 of the paper and paper products industry, ONP’s stock price should increase to around  $30.  However, since ONP is a foreign small-cap and relatively newly listed stock, it may be more reasonable to use a P/E of between 15-20, corresponding to a valuation of between $15.82-$21.09. 

ONP’s current ratio of 1.75, which is the ratio of its short-term assets to its short-term liabilities, is well above the industry average compared with its peers.  With only around 600 employees producing $102.14 in revenue, ONP has among the fewest employees, comparable to those of Victoria PLC which has 654 employees producing $62.97M in revenue.  Certainly, ONP still has lots of room to grow in terms of revenue and employees to catch up with other much larger paper and paper product companies with billions of dollars in revenue and many thousands of employees.  Based on its past earning releases, ONP should  present its second quarter results within the next few days, which the ONP management has suggested to be handily beating estimates.


Disclosure: Long ONP