Citi upgraded LEE & MAN PAPER rating to "Buy" and raised the target price to 4.2 yuan

Citibank recently released a research report, upgrading the investment rating of Lee & Man Paper (02314.HK) from "Sell" to "Buy," with a target price significantly raised by 75%, from the previous HKD 2.4 to HKD 4.2. This adjustment is primarily based on the judgment that the profitability cycle of the paper industry has bottomed out and is gradually improving. The current price of Lee & Man Paper corresponds to a forecasted price-to-earnings ratio of 8 times, offering a 4.2% dividend, making the valuation attractive.

The report points out that although Lee & Man Paper's own profit growth may not be as strong as that of its peer Nine Dragons Paper (02689.HK), the recent profit warning issued by Nine Dragons Paper conveys a key signal that the overall profitability of the paper industry is not expected to deteriorate further in the second half of 2025 compared to the first half. Citibank analysts believe that the most challenging period for industry profitability may have passed, and a moderate improvement is expected in the future.

From a business perspective, the report suggests that the profit recovery of Lee & Man Paper will mainly be driven by the rebound in profit margins of corrugated paper and tissue paper businesses. Citibank expects that benefiting from the strong rebound in profit margins of these two main products, Lee & Man Paper's gross margin will show a similar improvement trend as its peers: it is expected that the gross margin will significantly expand by 4.3 percentage points year-on-year in the second half of 2025, and expand by 1.1 percentage points compared to the first half. At the same time, sales are also expected to resume growth, with an estimated year-on-year increase of 5.9% in sales in the second half of 2025, reaching approximately HKD 14.288 billion, reversing the decline recorded in the first half due to falling product average prices.

The report also mentions that Lee & Man Paper is expected to announce its full-year results for 2025 in early March 2026, which could serve as a positive catalyst for the stock price in the near term. However, Citibank's preferred choice in the paper sector remains Nine Dragons Paper, due to its stronger vertical integration capabilities in the upstream and downstream, allowing for more effective cost control