From: GTE/hottrade (hottrade@gte.net)
Subject: Investors Edge Research Report
View: Complete Thread (2 articles)
Original Format
Newsgroups: alt.invest.penny-stock
Date: 1998/08/26
Investors Edge
Institutional Equity Research
John R. Switzer/Brian Volmer www.investorsedge.net August 19,
1998
Orient Packaging Holding, Ltd. (OTC: BB: ORPK)
Price..........................................$2.75
Price Range (52-weeks).........$2.75 - $9
Book Value/Share...................$0.29
Net Assets................................$56 million
Long Term Debt.......................$0
Shares Outstanding.................3.4 million
Float..........................................600,000
Average Daily Volume............5,000
..............Revenue............Operating..........................P/E
Year.......Millions................Margins........EPS..........Ratio
12/96A..$14.9...................7%...............$0.08...........34X
12/97A..$13.8...................5%...............$0.09...........30X
12/98E..$22.0...................8%...............$0.23...........12X
12/99E..$45.0.................14.8%............$0.60............4X
Comparable Companies Statistics
Symbol.....$$......P/E97A.....Grow%.....MktCap
WY..........$39......25X..........11%.........$7.7bil
MEA.......$29......25X...........5%..........$3.0bil
CSK.......$36......25X..........20%........$764mil
SPI.to.....$14.....75X.........100%........$686mil
Orient Packaging Holdings, Ltd., (OTC BB: ORPK), incorporated in
Delaware, is a leading manufacturer of bleached (white top) paperboard and
provider of packaging materials and services to major brand name consumer
products in China. The Company is experiencing rapid growth due to the
enormous demand for Western packaged consumer products in China. Orient
Packaging owns and operates packaging manufacturing facilities in China, and
is currently in a position to become one of the 5 largest paperboard,
cartonboard and packaging materials producers in China.
The Company?s top management consists of ?local? highly experienced paper
manufacturing professionals with over 40 years experience in paper and
packaging materials production. The V.P. of Sales and Marketing is a
committee member of the Hong Kong Institute of Packaging, as well as a
member of several other international packaging trade groups. In addition,
the CEO and CFO have a combined 30 years experience in Asian mergers and
acquisitions working with Bank of America and have structured hundreds of
millions of dollars worth of deals in China and Hong Kong.
Demand in China for packaged Western consumer goods such as Coca Cola,
toothpaste, beer, and other staple goods is increasing faster than in any
other country in the world. There are over 250 million in the spending
?middle-class? in China, and a total population of 1.2 billion. Gross
Domestic Product (GDP) in China is growing at one of the highest rates in
the world, estimated at 8% per annum. This translates into higher personal
incomes and a very high growth rate in the consumption of packaged goods.
Currently, demand for many packaged consumer goods far outstrips supply.
China introduced regulations in 1997 which eliminated nearly 50% of the
State owned and local small facilities that supplied paper products for
packaging materials used for consumer products. Import taxes of 50% -to-
100% make it too expensive for Western producers to import packaging
materials. This has caused significant investment activity in the paper
industry in China by Western companies who need packaging materials to
market consumer goods in the country. Orient Packaging is capitalizing on
this opportunity, expanding its capacity by acquiring low-cost facilities
from the State, and forming Strategic Partnerships with very large
multi-national paper producers that need Orient?s expertise in the Chinese
market place.
Orient Packaging is currently the only domestick supplier of cartonboard
to Weyerhaueser for use in its corrugated packaging for clients such as
Coca-Cola and Budweiser. The Company intends to capitalize on its China
expertise in packaging manufacturing to leverage relationships with giant
multinationals such as Weyerhaeuser.
Orient Packaging is making vertical acquisitions, purchasing printing and
packaging conversion (folding & cutting) companies. The Company is in the
process of acquiring Sun?s Printing, and is in the process of closing the
acquisition of a large Printing and Converter with 1997 sales of
approximately $15 million.
Based upon Orient Packaging?s high growth profile, unique position in the
paper industry in China, experienced management, strong economic
fundamentals in China with the dramatic growth in consumption of packaged
goods, we believe the Company would be more fairly valued at between
20X ?to- 25X its 1999E earnings, or between $9.00 and $11.25.
The Company
Orient Packaging Holdings, Ltd., (OTC BB: ORPK), incorporated in
Delaware, is a leading manufacturer of bleached (white top) paperboard and
provider of packaging materials and services to major brand name consumer
products in China. White-coated paperboard, is widely used as a covering
material for corrugated and other packaging for beverages, cigarettes,
cosmetics, food products and other staple consumer items such as toothpaste.
Orient Packaging is a key supplier of paperboard, packaging materials, and
printing and conversion serivces for major international companies with
highly recognized consumer brand names which produce their products in China
including Coca-Cola, Pepsi, Budweiser, Wrigley?s, and other Fortune 500
companies. Due to increasing consumer demand and the extreme tax advantages
of producing products in China (import taxes of between 50% -to- 100%), the
demand for packaging, printing, and conversion services is dramatically
increasing in China. In addition, foreign companies prefer to deal with
foreign owned, main-land China producers to manufacture and bring their
products to market.
The Company began operations in China in February 1997 with the purchase of
a 60% interest in Wuhan Dong Feng, a large paperboard manufacturing
facility. Dong Feng was originally established as a State Owned factory in
1954 in the City of Wuhan in the Yangtze river basin, the industrial
heartland of China. The Dong Feng facility produced approximately $14
million in revenue in 1996. Since this initial acquisition, Orient
Packaging Holdings, Ltd., has committed to one acquisition of a printing and
packaging company, signed a Letter of Intent to purchase a major packaging
conversion and high-tech printing company in China (1997 revenue of
approximately $15 million), and has several other acquisition targets and
Strategic Equity Partnerships planned. As a group, The Company is the
largest producer of paper board products in Central China.
Instrumental in the Company?s growth strategy are its key management
personnel. De Lenz Chang, V.P. Sales & Marketing has over 15 years
experience in the packaging industry in Hong King and China, including three
years as majority owner of a corrugated carton manufacturing company. Mr.
Cheng has worked for a number of international packaging groups, including
Spicers ansd Jacobsen Van den Berg, and is a full member of both the U.S.
and U.K. Institute of Packaging Professionals. He is also a full member of
the Hong Kong Institute of Packaging. Tan Yi Shen, General Manager of Wuhan
Dong Feng, has over 20-years experience in the pulp and paper industry in
China in all facets of the paper production business. Nils Ollquist,
Chairman and CEO, and David Sih, CFO, both have extensive investment
experience in China and Asia, having structured several deals totaling in
the hundreds of millions of dollars. Both Mr. Ollquist and Mr. Sih have
backgrounds in Mergers and Acquisitions, Mr. Ollquist having most recently
run Bank Of America?s Asian M&A operations.
Orient Packaging Holdings growth strategy is focused on a combination of
three main components:
I. Vertical Integration (downstream operations by acquiring printing and
conversion operations),
II. Capacity Expansion (acquire at a low cost, state run facilities and
improve productivity), and
III. Strategic Partnership (work with large multi-nationals such to fund
growth and expand production).
Much of the paper board industry in China is undergoing privatization from
State run enterprises. Many facilities are available for purchase/equity
joint ventures allowing the Company to expand its manufacturing capacity as
well as downstream its packaging converting and printing at a very low cost.
In addition, large multi-national paperboard and cartonboard manufacturers
need experienced in-country manufacturers with local and Western management
to help them get started in China. Orient Packaging and Weyerhaeuser are
currently in negotiations to establish a valuable strategic partnership
agreement. Under the terms of this partnership, the Company and Weyerhaeuser
will establish a jointly owned vehicle to acquire low cost, state of the art
paper manufacturing facilities in China.
The Opportunity in China for Consumer Products Packaging Companies
Demand for paperboard packaging materials is directly related to the level
of economic growth and prosperity in emerging market countries which are
making the transition from developing to developed economies. As per capita
Gross Domestic Product (GDP) increases, so does personal income, which then
translates into very high growth in consumption of goods and use of
packaging materials. A comparison of different countries growth rates and
per capita packaging material consumption indicates that there is a
threshold of per capita GDP per annum of approximately US$ 1,000 after
which growth rates in packaging consumption (ie. spending on packaged goods)
increases rapidly. These trends reflect changing expectations and habits in
consumer demand as economies make the transition from a developing market to
a more sophisticated consumer-market based economy.
GDP in China is currently slightly above $1,000 annually, and growing faster
than any other country in the world. There are over 250 million middle
class consumers in China currently, with a population total of over 1.2
billion. China?s spending middle class is equivalent to the entire
population of the U.S. Demand for Western products is increasing faster
than most producers can keep up with. Brand recognition requires that
consumer products companies use higher quality and more distinctive
packaging for their goods in order to capture market share. This means that
companies will be using more and more high-tech printing and paperboard in
the pursuit of market share.
China is already the third-largest consumer of paper and paperboard in the
world, behind the U.S. and Japan, and is expected to be the second largest
consumer of paper and paperboard products by the end of the next decade.
Consumption of paperboard packaging materials is expected to grow at an
annual rate of over 5.4% for the next several years.
Paper and Paperboard industries in China differ from similar industries in
Europe, the U.S. and other major consumer markets in two main respects:
First
China has limited forest resources and as a result, relies to a large
extent, on the use of recycled and alternative, but lower quality, fiber
sources and other raw materials. The result is paper and paperboard
produced in China has been inferior to that produced by more sophisticated
manufacturers in the West. Orient Packaging, with its Western technology,
stable supply of superior raw materials and low cost facilities is in a
position to produce the high quality paperboard demanded by Western consumer
products companies at a significantly lower cost than if the paperboard were
imported.
Second
China?s government introduced regulations, effective in 1997, to close down
all paper mills with a capacity of less than 10,000 tons of annual
production. This has shut down approximately 4,400 small mom & pop paper
mills leaving about 1,600 mills which produced approximately 9 million tons
of the 29 million tons of paper products consumed in China in 1996. The
resulting reorganization of the industry will produce a consolidation of
business to those paper mills currently operating above the minimum. In
addition, the regulation has caused significant investment activity in the
paper industry to expand production capacity at each mill and will create a
trend to develop higher capacity mills. Orient Packaging is capitalizing on
this opportunity not only by acquiring expanded capacity through equity
joint venture partnerships with larger local mills, but through Strategic
Partnerships with large multi-national paper producers such as Weyerhaeuser.
Orient Packaging Holdings, Ltd. Operations
Manufacturing: The Company?s paper mill for production of its paperboard
products, Wuhan Dong Feng, is located in a central industrialized area of
Wuhan City, Hubei Province, the main industrial and commercial center for
Central China. Wuhan has a population of over 6 million, and is a major
market itself, as well as having a large concentration of industrial
enterprises servicing the rest of China. Rapid growth and development is
now occurring , including significant foreign investment in industrial
production . Recognizing the strategic importance of Wuhan?s location for
the packaging indusry, many foreign packaging companies are investigating
the investment opportunities in this sector, with companies such as
Weyerhaeuser making significant investments in paper packaging converting
operations in the city.
Production: Paperboard production is very similar to other paper
production processes. In the production process, the fiber stock for
paperboard is prepared from raw materials by placing wastepaper or pulp
sheets into large digesting tanks with chemicals where a fiber slurry is
produced. The slurry is then moved to the paper machines where it is laid
onto large moving mats which move the slurry through rollers where it is
pressed and dried, producing a continuous line of paperboard that is either
wound onto reels or cut up separately into sheet. The coating of the
paperboard (white top) is carried out on a different ?off-machine? coater.
Wuhan Dong Feng has six individual paper machines and four digesting tanks
for producing fiber slurry to be used in the paperboard production process.
The existence of several machines creates a competitive advantage for Orient
Packaging by allowing for quick and efficient production of varying
dimensinos to meet customized customer specifications while minimizing
waste. The ability to carry out this process of producing paperboard of
varying specifications efficiently is a significant advantage in paperboard
manufacture.
The major cost factor for the Company is the raw material, fiber stock, for
the preperation of the slurry, which accounts for between 60% - 75% of the
paperboards sales price.
The type and amount of each type of fiber used directly correlates to the
quality of the paperboard. As a result, fiber supply is a crucial aspect of
the manufacturing process. Orient Packaging uses four different types of
fiber: 1. Virgin bleached kraft softwood pulp (BKSP), the highest quality
fiber stock; 2. Straw pulp, a lower quality low cost fiber stock; 3.
Mixed wastepaper; and 4. De-inked newspaper. BKSP is imported from North
America and trades at a price determined by international commodity markets.
Recycled paper prices are also determined by international commodity
markets. The Company has reliable sources for straw and recycled paper in
China, and has set up a joint venture trading company to ensure reliable
supply lines of imported fiber stock and other raw materials. The
proportion of BKSP and imported recycled paper used in the paperboard
production process is less than 10% and 30% respectively, which limits the
Company's exposure to volatility in the commodity markets. In addition,
most of the Company?s imported recycled paper comes from Hong Kong, where
prices are generally very stable.
All other components required for production are sourced from domestic China
manufacturers, which ensures reliable supply at a significantly lower cost
than that of imported items. The Company?s paper mill is located near the
banks of the Yangtze River and the Company has constructed its own water
treatment facilities at this source to ensure a cost effective and reliable
water supply. The large quantities of steam required for the paperboard
production process are produced on site by coal powered boilers.
Electricity is purchased from the Wuhan Grid and is not subject to
intermittent supply.
The Company employs approximately 750 people involved in the production
process.
Marketing & Distribution: Orient Packaging?s sales and marketing activities
are centered primarily in Wuhan, with offices and representatives in
Shanghai and Hong Kong. As of December 31, 1997, the Company had
approximately 30 major customers of which the largest accounted for
approximately 16% of sales.
The Company markets its white-lined paperboard under the ?Golden Horse?
brandname. The brandname, recognized for its quality and reliability, has
been established by Dong Feng Paper Mills for 40 years.
Orient Packaging paperboard is used by a wide range of domestic and
international consumer product manufacturers for packaging their products
for sale in China. Consumer product manufacturers subcontract the
conversion (folding/shaping) and printing of their packaging to packaging
printers & converters such as Foshan, which Orient Packaging is in the
process of acquiring. The consumer products companies do the actual
packaging of the products. Distribution of finished paperboard products is
made by road, rail and river barge on the Yangtze river which passes through
the city.
Market Positioning
The packaging industry in China is currently characterized as follows:
Domestic suppliers are unable to meet growing demand caused by the ramp up
in consumption of packaged consumer goods; The extreme import taxes of a
minimum of 50% force producers of consumer goods like Coca Cola, Budweiser,
and many others to produce and package their products in China; Chinese
State owned paper mills produce very poor quality packaging materials, are
inefficient and unreliable; Foreign multi-nationals experienced in
packaging production trying to get started in China, such as Weyerhaueser,
are desperately seeking experienced ?in-country? strategic partners with
China based facilities and a combination of local and Western management
such as Orient Packaging Holdings.
Orient Packaging is in an ideal position to quickly become one of the top 5
paperboard, cartonboard, and printing and conversion companies in China.
The Company owns and operates the largest carton-board mill in Central China
with an annual capacity of 40,000 metric tons. Orient?s brandname
paperboard products are recognized as high quality, and are currently used
by several major multi-national brandname consumer products companies for
packaging in China. The Company has a strong advantage in pricing versus
imports and is one of the most cost effective, high quality paperboard
manufacturers in China. Western consumer products manufacturers demand this
high quality for their goods. The Company has a well established and
extensive distribution network of buyers comprised of both paper dealers and
corrugated box manufacturers throughout China, including Central (Sichuan
province) and Southern China, as well as the economically important Eastern
coastal regions of Shanghai, Fujian and Zhejiang provinces.
The Company?s growth strategy includes:
Downstream/Vertical Integration and Consolidation: Orient Packaging
Holdings will acquire printing and packaging converting facilities to
capture higher operating margins and expand its presence as a major
consolidated packaging materials and conversion provider in China. The
Company is in the process of acquiring one medium sized printing company,
Sun?s Printing & Packaging. Sun?s is a manufacturer of high quality
shopping bags and paper packaging for major foreign brands including Hermes,
Gucci, Marks & Spencer. Sun?s produced approximately $3 million in sales in
1997. In addition, Orient Packaging has signed a letter of intent (LOI) to
acquire Foshan Color Printing Factory. Foshan is a major converting and
printing company operating a technology intensive plant on 33 acres of
land. Foshan produced approximately $14 million sales in 1997, with net
after tax earnings of $1.5 million. Foshan is one of only two manufacturers
in China supplying packaging materials to Wrigley?s chewing gum.
Expansion of Capacity through Acquisitions and Operating efficiency: Orient
Packaging Holdings is currently expanding capacity through leasing and
acquiring in the form of equity joint ventures from Chinese State Owned
facilities which have underutilized plant capacity and plants that have been
shut down. These leases and equity joint ventures are available at
extremely favorable terms to the Company. The Company signed an agreement
to acquire, through leasing, a state of the art plant near Shanghai which
will expand paperboard production by approximately 18,000 metric tons. This
lease expansion should be finalized by October 1998.
Strategic Alliances: Orient Packaging has been approached by several
large multi-national paper manufacturers to form strategic alliances to own
and operate production facilities in China. These partnerships give the
Company an equity interest in a production facility in exchange for their
expertise in operating paper mills in China. Weyerhaeuser initiated
discussions with Orient Packaging in mid 1997 to form a strategic
partnership which would purchase and expand a very large carton board plant
in Central China with capacities of approximately 100,000 metric tons
annually. The agreement would give Orient Packaging 10% ownership in the
Production facility in exchange for Orient?s expertise in managing the
operations of the plant and the marketing and distribution of packaging
products in China. The strategic partnership is expected to become
effective in 1998.
Financial Valuation
Orient Packaging has initiated an aggressive growth campaign in China and is
in a unique position to leverage its current position as a moderate sized
paper producer into becoming one of the largest paper producers and
packaging materials converters in all of China. Through low cost capacity
expansion, strategic alliances already underway with large multi-national
paper producers such as Weyerhaueser, and downstream acquisition and
consolidation, we believe Orient Packaging Holdings will quickly become the
largest provider of packaging materials and services for Western based
consumer products companies. China is the fastest growing market for
consumer products with over 250 million middle class consumers and a
population of 1.2 billion. Demand for Western consumer products is far
outstripping supply. Marketers are increasingly using the tried and true
method of more sophisticated packaging in order to garnish brand recognition
and market share.
Orient Packaging is a solid high growth company with a strong presence in
mainland China. The Company has consistently produced positive earnings,
and produced over $13 million in revenue with EPS of $0.08 in 1997.
Projected 1998E revenue should approach $25 million with net profit of about
$1 million and EPS of $0.23. The Company?s balance sheet is strong with
nearly $8 million in current assets, no debt, and a book value of $0.25.
With capacity expanded to nearly 60,000 metric tons in 1999, plus the Foshan
and Sun?s Printing deals, we expect ORPK to have 1999 revenue of $45
million, net profit of approximately $3.2 million, with EPS of $0.60. In
addition, operating margins should improve substantially in 1999 with the
consolidation of the paperboard production with several ?downstream?
operations providing printing and conversion services.
NMS Listing: Orient Packaging is in the process of preparting all necessary
documents to begin trading on the NASDAQ NMS system. The Company expects
that it will be in a position to meet all of the requirements imposed by the
NASD for listing, and should begin trading full NASDAQ before the end of
1998.
Based upon Orient Packaging?s high growth profile, unique position in China,
superior product and management, and the dramatic growth in consumer goods
purchases in China, we believe the Company would be more fairly valued at
between 20X ?to- 25X its 1999E earnings, or between $12.00 and $15.00. When
compared to other packaging producers with significantly less growth
potential than Orient Packaging Holdings Ltd., the Company is greatly
undervalued currently. Companies such as Weyerhaueser (NYSE: WY), Mead
(NYSE: MEA), and Chesapeake (NYSE: CSK), which have similar business units,
trade in excess of 25X their forward EPS, while growth companies in the
paper industry, such as St. Laurent Paperboard (TSE: SPI) trade in excess of
40X their forward EPS.
Orient Packaging Holdings, Ltd., currently trades on the NASDAQ OTC Bulletin
Board under the symbol ORPK.
Investors Edge is not a registered investment advisor or broker-dealer.
John Switzer & Brian Volmer are leading corporate finance experts. This
recommendation is not and is under no circumstances to be construed as an
offer to sell any securities. Investors Edge and its officers and employees
may have an interest in some or all of any securities mentioned herein, and
may be compensated by the companies mentioned herein. The information set
forth herein has been derived from sources believed to be reliable, but is
not guaranteed as to accuracy and does not purport to be a complete analysis
of the securities, companies, or industries involved. Further information
on companies and/or securities mentioned is available on request. |
