Orient Paper Reports Second Quarter 2013 Results

Aug. 12, 2013 - Orient Paper, Inc. (NYSE MKT: ONP), a leading manufacturer and distributor of diversified paper products in North China, today announced unaudited financial results for the second quarter ended June 30, 2013.

Key Highlights for Second Quarter 2013:

  • Secured RMB150 million (approximately US$24 million) financing arrangement to fund new tissue business expansion
  • Construction of tissue paper production facility on schedule
  • Maintain 2013 net income and EPS guidance

Chairman and Chief Executive Officer of Orient Paper, Mr. Zhenyong Liu commented, "We are pleased to report that our businesses have started to recover with production ramping up steadily from the previous quarter and the decline in raw material costs. As a result, the Company's overall profitability has improved even though the economic environment remains challenging."

Mr. Liu added, "Our expansion into the tissue paper segment is also progressing well. The construction works in the Wei County Economic Development Zone site is on schedule to be completed by the end of 2013, and we have successfully obtained the $24 million financing arrangement, which reflects creditable rating of Orient Paper as a Company especially in the midst of tight credit conditions in China. This financing will provide adequate working capital for the later stage of the expansion plan critical to driving our mid to long term business growth."

Mr. Liu concluded, "Orient Paper is committed to establish a track record for solid financial performance. With product prices gradually stabilizing, we reiterate our commitment to meeting our 2013 guidance.

FINANCIAL REVIEW: Quarter ended June 2013 Financial Results compared with quarter ended June 2012


Total Revenue in the second quarter of 2013 was $33.0 million, decreased 7.0% from $35.5 million.

Corrugating Medium Paper ("CMP")

  • Revenue from CMP decreased 4.6% to $20.6 million, representing 62.3% of total revenue. The decrease was mainly due to the suspension of operation of CMP production line PM1 for modernization since the end of 2012.
  • Volumes sold were down 5.8% to 55,025 tonnes, which were solely produced from PM6. No CMP was produced from PM1, which contributed 20,269 tonnes to the second quarter 2012 sales revenue.
  • ASP increased 1.4% year-over-year to $374/tonne, as the downward pressure in the Chinese packaging paper industry started to ease off.

Offset Printing Paper

  • Revenue from offset printing paper in the quarter decreased 6.9% to $11.3 million, representing 34.1% of total revenue. The decrease is mainly attributable to the decline of the ASP in the second quarter of 2013.
  • Volumes sold were down 1.2% to16,424 tonnes.
  • ASP decreased 5.8% year-over-year to $686/tonne.

Digital Photo Paper

  • Revenue from digital photo paper decreased 35.8% to $1.2 million, representing 3.6% of total revenue.
  • Volumes sold dropped 36.4% to 311 tonnes, resulting from the suspension of night-time operations that started since October 2012, due to intensifying restrictions from government urban planning officials and rising pressure from the residential community, owing to the increasing presence of residential buildings in the neighborhood.
  • ASP increased 1.0% year-over-year to $3,870/tonne.

Cost of Sales
Cost of Sales in the second quarter of 2013 was $26.9 million, down 9.4%, primarily due to the decrease of revenue and declining raw material cost during the quarter. Costs per tonne for CMP went down by 3.6% to $299, due to the drop of the recycled paperboard cost correlated to the sudden decline in price of the imported recycled paper, which is a result of the Chinese government's "Green Fence" policy lifting the import standards for all recycled materials. The policy has been implemented since February and will be in force till the end of 2013.

Gross Profit
Gross profit in the second quarter of 2013 was $6.1 million, up 5.4% from $5.8 million for the second quarter of 2012. The improvement was mainly due to the decline of raw materials costs and a slight increase of ASP for CMP.

Overall gross margin in the second quarter of 2013 was 18.5%, up from 16.3% for the second quarter of 2012. Gross profit margins for CMP, offset printing paper and digital photo paper for the second quarter of 2013 were 20.0%, 15.8% and 16.5%, respectively. Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") were $0.9 million for the second quarter of 2013, up 29.2% from $0.7 million for the second quarter of 2012.The increase was mainly due to land lease payment for the Wei County industrial park facilities, which was not present until the fourth quarter of 2012.

Income from Operations & Operating Margin
Income from operations was $5.2 million for the second quarter of 2013, up 2.2% from $5.1 million for the second quarter of 2012, primarily due to the increased gross profit margin. Operating margin improved to 15.8% from 14.4% a year ago, as well as 3.8% from the previous quarter. EBITDA

Excluding the impact of interest expenses, income tax expenses, depreciation and amortization, EBITDA, a non-GAAP measurement, was $7.1 million, down 1.4% from $7.2 million. See Note 2 hereto for a reconciliation of Net Income to EBITDA.

Net Income
Net income was $3.7 million, up 1.3% from $3.6 million. Basic and diluted earnings per share for the second quarter of 2013 were $0.20, compared to $0.20 for the corresponding period of 2012.

Cash, Liquidity and Financial Position
As of June 30, 2013, cash and cash equivalents were $22.5 million, compared to $13.1 million at the end of 2012.In the second quarter of 2013,Orient Paper generated net cash flow from operating activities of $9.1 million, representing a decrease of 34.1%, from $13.9 million for the corresponding period of 2012.

Working capital was $19.3 million at the end of June 30, 2013. Short-term debt was $4.0 million, and long-term debt was $30.3 million, of which $24.5 million are long-term obligations under capital lease. As of June 30, 2013, shareholders' equity totaled $149.7 million, compared to $142.8 million at the end of 2012.

Operations and Business Updates
PM6 ramp up on track. The average utilization rate in the second quarter of 2013 was 61.1%, compared to 36.8% in the previous quarter. The Company will continue to focus on the ramp up of PM6 in the second half of 2013 to achieve the goal of an average utilization rate of 70% by the end of fiscal 2013.

PM1 Modernization Plan
As announced earlier, Orient Paper has voluntarily shut down PM1 as part of its facility upgrade plan. The modernization will transform PM1 into a more energy-efficient production line, producing higher quality and higher profit margin products. The management is evaluating the feasibility of different options for the modernization, including the possibility of moving the location of the production line from Baoding to the Wei County industrial park, the site of the new household/tissue paper production facilities.

Tissue Paper Expansion on schedule
Orient Paper has started building the factory and other infrastructures for the household / tissue paper production facilities located in the Wei County Economic Development Zone in Hebei Province since mid- February this year. The building of the factory is set to be ready by the end of the third quarter for the installation of PM8, the first 15,000 tonnes-per-year production line. Installation of PM8 is targeted for completion by the end of the second quarter of 2014.

Relocation and sale of headquarters estate
As announced separately today, in order to comply with the recent Xushui County urban development plan mandates to develop the area where the Company's Headquarters Compound is located into residential area, the Company's Audit Committee and the Board of Directors have approved the sale of the land use rights of the Headquarters Compound, the office building and all industrial-use buildings (the "Industrial Buildings"), and three employee dormitory buildings located within the Headquarters Compound (the "Dormitories") to Hebei Fangsheng Real Estate Development Co. Ltd. ("Hebei Fangsheng") on August 7, 2013 for a total sales prices of $8.23 million.

In connection with the sale, Hebei Fangsheng agrees to lease the Industrial Buildings back to Orient Paper for a term up to three years, while the Company explores different options to relocate its office and Digital Photo Paper workshop for PM4 and PM5. The net proceeds from the sale were approximately $7.84 million and are expected to be used to fund the Company's household and tissue paper business expansion.

Government continued to push for industry efficiency and environment conservation
Following the Ministry of Industry and Information Technology's ("MIIT") April 2013 announcement to retire a total of 4.6 million tonnes of old and inefficient paper production capacities in China, the Hebei Province also announced in May its target to close 2.15 million tonnes of paper production capacities in 2013. In July, the MIIT released its list for the first phase of the 2013 closures for 6.2 million tonnes in the country, with 0.9 million tonnes of such capacities located in the Hebei Province. This has led to the expectation in the market that the actual closures for 2013 may eventually exceed the earlier announced target plan. While this will curb surplus capacity, several industry analysts view that paper ASPs are not likely to recover significantly for the rest of the year.

As a leading player in the fragmented North China packaging paper segment, Orient Paper is committed to both efficiency and environmental conservation, and believes it is well positioned to take advantage of the mandatory closures to increase market share and further establish its leadership in the industry consolidation."

Orient Paper, Inc. (www.orientpaperinc.com) is a leading paper manufacturer in North China. Using recycled paper as its primary raw material, Orient Paper produces and distributes three types of paper products namely, packaging paper (corrugating medium paper), offset printing paper, and other paper products, including digital photo paper, and household/tissue paper that the company is currently expanding into.

With production operations based in Baoding in North China's Hebei Province, Orient Paper is located strategically close to the Beijing and Tianjin region, home to a growing base of industrial and manufacturing activities and one of the largest markets for paper products consumption in the country.

Orient Paper's production facilities are controlled and operated by its wholly owned subsidiary Shengde Holdings, Inc., which in turn controls and operates Baoding Shengde Paper Co., Ltd., and Hebei Baoding Orient Paper Milling Co., Ltd for manufacturing digital photo, printing and packaging paper.

SOURCE: Orient Paper, Inc.