Revenue and profits doubled, and the dividend yield exceeded 4%, how about the value for LEE & MAN PAPER (02314)?

The "Middle East situation" is triggering a supply chain crisis, and the expectation of rising commodity prices brought by "freight transmission" has led to a high dependence on imported wood pulp in China, providing investment opportunities for the paper industry sector. In fact, the Hong Kong stock paper sector started to pick up in May last year, with valuation bottoms and industry-wide earnings surprises, which changed investors' views on the fundamentals of the paper sector. Southbound funds continued to flow in, pushing up the stock prices of paper companies. As of now, the paper sector has increased by more than 80%, with industry leader ND PAPER (02689) and strong performer LEE & MAN PAPER (02314) achieving impressive performances, with gains of 176% and 90% respectively. Recently, LEE & MAN PAPER released its 2025 financial report, achieving revenue of HK$26.642 billion, a year-on-year increase of 2.49%, and net profit attributable to shareholders of HK$1.941 billion, a year-on-year increase of 47.87%, falling within the forecast range. In addition, the company's basic earnings per share was HK$0.452, with a proposed final dividend of HK$0.093 per share, and a full-year dividend of HK$0.159 per share, a year-on-year increase of 48.6%, with a dividend yield of over 4%. The company's profitability has significantly increased, with gross profit margin and net profit margin for 2025 being 14.63% and 7.29% respectively, representing year-on-year increases of 2.65 and 2.23 percentage points. The company disclosed that it has taken proactive strategies, fully leveraging the vertical integration advantages of pulp and paper, through flexible allocation of internal pulp production capacity and external procurement, effectively mitigating the cost pressures caused by significant fluctuations in raw material prices, while also advancing multiple production line technology upgrades and efficiency testing projects to improve overall efficiency. The day after the financial results were announced, the company's stock price opened high and quickly rose, but due to unfavorable market conditions, it fell back in the following two trading days to fill the opening gap. With both revenue and profit improvements, ROE return rate at 6.38% LEE & MAN PAPER has a vertically integrated pulp industry chain layout, mainly operating three major business products: packaging paper, sanitary paper, and pulp. In 2025, amidst continuous geopolitical conflicts and persisting economic uncertainties caused by US President Trump's policies, inflation remained high. In this environment, the company fully leveraged the optimization of pulp integration to achieve revenue and profit growth. In 2025, revenue from packaging paper and sanitary paper increased steadily, while revenue from pulp as part of the raw material supply decreased. Revenue shares were 75.7%, 22.58%, and 1.68%, respectively. Benefiting from cost advantages of pulp integration, gross profit margin saw a significant increase. In 2025, gross profit was HK$3.896 billion, a year-on-year increase of 25.15%, with a gross profit margin of 14.62%, a year-on-year increase of 2.65 percentage points. Overall expenses showed a downward trend, with an expense ratio of 8.3%, a year-on-year decrease of 0.5 percentage points. Sales and administrative expenses were relatively stable, while financial expenses decreased significantly, with a year-on-year decrease of 34% and a decrease of 0.4 percentage points in the financial expense ratio. Specifically, all three major business products maintained profitability, with an overall increasing trend in profit margins. The profits of these three major business products in 2025 were HK$1.268 billion, HK$1.063 billion, and HK$100 million, accounting for 52.34%, 43.7%, and 4.11% respectively, with profit margins of 6.28%, 17.7%, and 22.37% respectively. The overall profit margin was 9.13%, a year-on-year increase of 1.98 percentage points. Data source: Company financial reports In 2025, LEE & MAN PAPER's ROE was 6.38%, a year-on-year increase of 1.69 percentage points. The company's asset return rate is relatively low, mainly due to its heavy asset industry nature, with the net profit margin and ROE of the paper industry generally low. For example, ND PAPER had net profit margin and ROE of 4% in 2025, lower than the company by 2 percentage points and 2.38 percentage points, respectively. Furthermore, the industry tends to have high debt levels, with ND PAPER having a debt ratio of over 60%, while the company's debt ratio is only 47.2%. As of December 2025, the company has a cash balance of HK$1.942 billion, accounting for 28.1% of short-term interest-bearing debt. The company sees overseas markets as a key development strategy, expanding its presence in export markets such as Southeast Asia along the Belt and Road Initiative and Europe, and has established production bases in Southeast Asia. In the past two years, the company's operating cash flow has continued to net inflow, providing enough security cushion for overseas expansion capital expenditures while meeting debt obligations. Price increase expectations and capacity release, coupled with generous dividends gaining favor LEE & MAN PAPER's production capacity is mainly distributed in China, Malaysia, and Vietnam. In terms of non-current assets, China is the core, with HK$33.012 billion in 2025, accounting for 74.35%, while Malaysia and Vietnam had HK$8.187 billion and HK$2.245 billion, respectively, showing minimal change over the past two years, with proportions of 20% and 5.05%, respectively. It can be seen that the company's overseas expansion is cautious. ND PAPER also has a presence in Malaysia and Vietnam, with significant competition between the two in business. However, the company's market revenue in Malaysia and Vietnam is steadily expanding, with external customer revenue share from that region in 2025 increasing to 17%, a year-on-year increase of 5 percentage points, while external customer revenue share from China decreased to 84%. Data source: Company financial reports The company's asset revenue generation capability is relatively stable, with a non-current asset turnover rate of 0.6, relatively stable year-on-year compared to ND PAPER's 0.25. This is mainly due to the company's relatively smaller scale and less heavy asset structure, under the integration of pulp, with significant wood pulp sales and gradual increase in the overseas market, contributing to an improvement. Additionally, the company's ability to collect payments has significantly improved, with credit terms of 45 to 90 days given to clients. In 2025, accounts receivable were HK$3.025 billion, a decrease of HK$0.295 billion year-on-year, with receivables not exceeding 30 days accounting for 59.6%, a decrease of HK$0.375 billion year-on-year, and accounts receivable turnover days at 41.5 days, a decrease of 5.11 days. In 2026, LEE & MAN PAPER's capacity revenue generation and profitability capabilities are expected to improve. On one hand, amidst the US-Iran conflict, institutions generally predict that oil prices will rise to above $150, which will drive an industry-wide price increase trend through freight transmission. As the company's main markets are in China, Malaysia, and Vietnam, the impact on demand is relatively small. On the other hand, the company's pulp integration continues to be effective, with an expected optimization of revenue structure for the three major business products based on price changes. It is worth noting that the company is actively embracing the AI era, deploying AI in the paper industry through automation and artificial intelligence technologies to simplify production processes, optimize procedures, and achieve energy savings and emission reductions through upgrades in power plant technology, effectively controlling costs and improving internal efficiency. The company is actively testing production line efficiencies and pursuing technological upgrades, aiming to drive full capacity release in 2026 and boost performance growth. The company is highly regarded by investment banks, with Citigroup continuing to follow it and recently issuing the second report of the year, stating that LEE & MAN PAPER's performance last year exceeded expectations, leading to a 12% to 13% increase in the company's profit forecasts for the next two years. The bank believes that the company's production capacity in China and ASEAN is likely to grow moderately in 2026, with the possibility of continued expansion in gross profit margin. It maintains a "buy" rating for the stock, with a target price raised to HK$4.3, a 14% increase from the current price. LEE & MAN PAPER has been very generous in dividend payouts, distributing dividends of HK$0.086, HK$0.107, and HK$0.159 per share in 2023-2025, with a compound annual growth rate of 36%. Based on the dividends for 2025, the dividend yield reached 4.22%, while in comparison, industry leader ND PAPER has not distributed dividends in recent years. In terms of market capitalization return, LEE & MAN PAPER's performance is better compared to its peers, with a cumulative increase of 83.9% in the past three years. In conclusion, as a standout in the paper sector, LEE & MAN PAPER's performance in 2025 saw revenue and profit growth, significant improvement in profitability, and continuous release of overseas capacity. Expected price increases and ongoing optimization of costs through pulp integration, AI, and operational efficiency improvements, are likely to drive performance growth. The company's focus on shareholder returns and generous dividend policy make it an attractive investment option.