StockTradeAnalyst's  Instablog

The chatter over the acquisition of Orient Paper (ONP) is getting louder recently as ONP stock continues to be under pressure due to the allegations of Muddywaters over two months ago.  Although Muddywaters has withdrawn these allegations, fear and inertia have kept the stock trading at rock bottom prices.  An acquisition by either ONP's competitor or a private investor group would make sense at these levels, as ONP continues to make handsome profits and its revenue is predicted to continue to grow rapidly in the coming quarters.  Stay tuned for further news.


Disclosure: Long ONP

Orient Paper is currently trading at only $4.4/shr which is well below their sales of $8.5/shr and their book of of $5.0/shr.  Its numbers are among the best in the paper industry as stated in the last quarterly earning release:

Second Quarter 2010 Highlights and Recent Events
-- Revenue increased 70.8% to $38.3 million
-- Gross profit increased 129.9% to $9.1 million -- Gross margin increased 610 basis points to 23.9%
-- Operating income increased 100.5% to $7.4 million
-- Excluding the $1.1 million non-cash charge related to the disposal of property, plant and equipment, non-GAAP operating income increased 129.8% to $8.5 million, or 22.2% of sales (*)
-- Net income increased 116.3% to $5.4 million, or $0.30 per share
-- Excluding the $1.1 million non-cash charge related to the disposal of property, plant and equipment, non-GAAP net income increased 160.0% to $6.4 million, or $0.36 per share (*)
-- Digital photo paper sales quantity reached 102 tons during the month of June 2010

"We achieved strong revenue and earnings growth during the second quarter," commented Mr. Zhenyong Liu, Chief Executive Officer. "Our performance was driven by increased pricing in both our medium-grade offset printing and corrugating medium paper businesses, a significantly higher volume of sales in our medium-grade offset printing paper business, and the contribution made by our new digital photo paper business. We are also very pleased with our bottom line performance, which benefited from our strong sales growth, and the contribution of our higher margin digital photo paper business."

ONP is also growing fast with its future secure in the world's fastest growing market.  CEO Liu stated, "Due to the rapidly increasing prices of wood pulp and the government's environmental protection initiatives, the demand for medium-grade offset printing paper as a substitute for the high-grade printing paper that consumes wood pulp continues to exhibit robust growth. We are confident that the strong market demand, partly caused by the government-mandated elimination of inefficient capacities, may continue into the second half of the year."

ONP's stock price is currently near its all time low and ONP's price per earning is the lowest in its industry.  This is expected to correct itself soon, especially now that Muddywaters has withdrawn their false allegations and moved on.  The target price is $15-16 in a year.

Disclosure: Long ONP

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. (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