China Paper - under valued?

I have purchased an additional stake of 5 lots at 33 cts on top of my initial investment of 5 lots at 29.5 cts, bring my average price ot 31.74 cts. (see original posting here)

CP has just announced a very good set of Q1FY06 results, with revenue up 35.5% & net profit up 55.1%. My intrinsic value for this stock is almost 91 cts and dividend yield of more than 7%.

My purchase was partly prompted by Wallstraits who has taken 2,400 lots at average of 37.9cts. This stock is definitely not for "Permanent Holding" due to the commodity type of business and low barrier of entry. My investment is purely based on valuation basis due to current demand for paper products. For now, I would hold it at just this level due to some reservation about the transparency & corporate governance issue.


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(1) Open market disposal by Director, Li Han Pu 5/4/06

No. of Shares held before the change 145,950,000
As a percentage of issued share capital 36.4875 %

No. of Shares which are subject of this notice 49,950,000
As a percentage of issued share capital 12.4875 %

Amount of consideration (excluding brokerage and stamp duties) per share paid or received 0.4811

No. of Shares held after the change 96,000,000
As a percentage of issued share capital 24.00 %

(2) Open market disposal by Director, Li Han Pu 20/3/06

No. of Shares held before the change 160,000,000
As a percentage of issued share capital 40.00 %

No. of Shares which are subject of this notice 14050000
As a percentage of issued share capital 3.5125 %

Amount of consideration (excluding brokerage and stamp duties) per share paid or received 0.378

No. of Shares held after the change 145,950,000
As a percentage of issued share capital 36.4875 %

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Below some comments from CNA forum:
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puzz

Joined: 01 May 2006
Posts: 27

Posted: Sun May 07, 2006 11:29 pm Post subject: China Paper: Post strong 1Q ,what Next?

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27/04/06 Dir Mr. Chen Yong Post 55% Net surge

Let take brief summary on CP;
14/7/04 Listing IPO @0.375 Hit high @ 0.415 first trading day.
since after,price steady,little fluctuated between 0.265 to 0.315
18/10/05: CFO resigned, CP drop to 0.20
22/10/05 price bound again to 0.27
28/02/06 Post FY05----25% net jump,EPS 0,37 RMB DPS 0.111
Cp trade @0.365
03/03/06 Dir start reduce stake
Mid /03/06: one Broker firm call ' Strong Buy. Target Price 0.63'
Cp surge to 0.515,top vol for several days.
trade steady Fr 0.485 to 0.510
Early April 06:The same broker firm suddenly call 'SELL. Target price
0.37.
CP hit and down to o,39 but manege to stand firm @0,40

05/04/06: CP dir stop reduce stake.remain at 24% holding.

Forumers War start,attacking/supporting
Attacker say' ...CFO resign on mid of financial year is a
bad signal.........'
' The problem with CP is the magamement has
zero creditility.............'
Supporters say' attack it, but still hold it n keep buying more...
' Trader stretagy......'
' What tactic is it,
http://www.chinapaperexpo.com/
industry.html....."

CP trade steady @ 0.40
27/04/06: Post FY 06 1Q ,strong result.
CP trade @0.40 to 0.425

04/05/06: XD,but still stand firm at 0.40

What Next? Hold? Buy? Sell?------all contradited.
What U say?

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ming

Joined: 02 Aug 2005
Posts: 686

Posted: Mon May 08, 2006 8:48 am Post subject:

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ming wrote:
I heard from a fellow forummer that Curtis Montgomery has just entered a position into China Paper, should you follow?

Let’s recap some facts about China Paper.

- CFO resigned
- Auditors resigned in the middle of the financial year. Costs are cited but given the profitability of the company, it is hard to understand why the company did not retain KPMG to assure shareholders
- Share price falls before news of auditor resignation was made public
- Insiders have sold their substantial stakes in the company
- The stock price has gone up despite massive open market sales by insiders
- Financial results for China Paper continues to be good

This series of events is very troubling. It seems to suggest that the financial picture painted by the statutory filings is not entirely accurate. Short of the auditors refusing to sign off on the accounts, this is the clearest sign that there is something very wrong at China Paper.

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- Large multibillion dollar investments by the major players in the China paper market, hence there is a potential for over capacity
- Environmental regulation is a possibility as China strives to clean up
- China Paper is a very small paper manufacturer. It is not amongst the top 20 producers in China

The above points suggest that China Paper will face pricing pressures in the near future even as its costs related to complying with new environmental regulations escalate. So even if there are no problems with the past accounts, prospects for this company are likely to be a lot dimmer than their past performance suggests.

Montgomery has said many times that he makes decisions that are right for him and that it may not be in people’s interest to follow him. I would urge all who have gotten excited by Wall Straits purchase of China Paper to give serious thought to that statement. I still hold that some party out there holds a large quantity of China Paper shares which they cannot off load onto the market. It is only because someone has been willing to mop up all the shares coming onto the market that the price of China Paper shares has not fallen as much as the massive open market sales by insiders would suggest. The stock’s inability to rise despite good Q1 results points to exhaustion on the part of the parties manipulating the stock price.

As always, good luck to all!


Gordon Gecko wrote:
The problem with China Paper is that the management has zero creditibility.

An analyst wrote in black and white (short of calling the Chairman a two face liar) saying the management cannot be trusted, all bets are off!!!

I was at the AGM a few days back and questioned the Chairman, "How can you as a businessmen let a person get away with defaming you? Calling you a liar (though not in those exact words) and mentioning that nothing you say can be trusted or believe?"

The Chairman's inaction, indifference (not pressing ahead with a lawsuit for slander/defamation), only leads me to believe that the analyst probably has witnesses or recorded the meeting (and is able to justify his allegations).

The other conspiracy theory is that the analyst and the Chairman of China Paper are in some kind of scandal together (price manipulation). There are conjectures that the big sell off was to a friendly party.

Personally, I am shocked that MAS or SGX did not probe into the possible conspiracy.

One day the analyst calls for a Strong Buy based on rare combinations of:
1. Solid earnings growth of average 22% per year for FY06, 07 and 08 (based on this analyst's forecast).
2. Attractive valuation of only 5X PE
3. Solid ROE 30%+
4. Awesome dividend yield 6%+

Few days later, this analyst calls for a Sell because management cannot be trusted!! Management conned him (analyst) about not selling more shares in the open market.

All of a sudden, everything the analyst mentioned earlier for his Buy recommendation disappears in smoke. In other words, the accounts may be doctored!!! "Nothing the management says or reports can be trusted!"

Management has no reaction to the allegations. This makes me highly suspicious that something is definitely amiss.

The biggest worry about China Paper right now is that the books may be cooked up (creative accountings).

I insisted that the Auditors should be changed to one that is more reputable (like the big four). Fellow shareholders agreed (during the vote at the AGM) and management has agreed to put this up to the audit committee. I doubt they will do anything (more empty promises).

There is something not right here (possible conspiracy), SGX and MAS should probe before its too late.

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DanielXX

Joined: 19 May 2005
Posts: 295

Posted: Sat May 27, 2006 4:36 pm Post subject:

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Only a very select group of China stocks will resurface and rebound following the recent correction. Once bitten twice shy. Where is the liquidity going to come from? Definitely not retail.... there are many now who will be wary of over-bidding share prices, and especially so for China stocks I'm afraid. There are tons of stocks with attractive valuations, and perhaps one lesson we should all learn is that institutional buying doesn't mean anything. Look at the placements and institutional sales that were done in the past few months at prices which are substantially above what the stocks are trading at now.... Man Wah, ASL Marine, Sunray, Hongguo, Celestial (to JF Asset Mgt), and of course all the IPOs.

Does China Paper have a competitive industry position? Not that I know of, based on what I've read and of China government's plans to clean up and consolidate this particular industry. Those investing must be very wary of this particular risk and track the position of the entire industry. Furthermore, the demand-supply dynamics of such undifferentiated goods can be considered as highly cyclical, similar to chemicals, so monitor doubly vigilantly. Invest for the right reasons, and not just because PE is low (tons of companies to choose from now) or earnings track record is good (so was SP Chemical's before it reversed drastically). I know you must take risks to take profits, but at least be aware of WHAT risks.