UBS has issued a research report maintaining its Buy rating on ND PAPER (02689) with a target price of HK$11.82.

For the fiscal year 2026 ending in June, the company's net profit surged 103% year-on-year to RMB 3.58 billion, coming close to the upper end of the company's profit guidance. Paper product sales volume rose 14% year-on-year to 24.5 million tonnes, slightly above the bank's forecast of 24.4 million tonnes. Gross margin expanded 3.1 percentage points year-on-year to 14.6%, exceeding the bank's expectation of 14.1%.

Earnings growth was driven by average selling price increases outpacing rises in fiber and energy costs, reversing the industry-wide margin compression trend. Management has guided for flat paper product sales volume in fiscal year 2027, with pulp production rising 1 million tonnes year-on-year to 5.8 million tonnes.

The bank noted that the company plans to add a net 1.32 million tonnes of paper production capacity by the end of 2027, including a 700,000-tonne high-end containerboard replacement project in Beihai and 620,000 tonnes of new capacity in Dongguan. On the pulp side, the company remains on track to add 2.5 million tonnes by the end of 2027 and has approved an additional 600,000-tonne pulp line in Taicang, expected to commence production in the second quarter of 2028.

As pulp self-sufficiency rises, Chairman Zhang Yin stated that the company may enter the tissue paper business, with an initial target capacity of 200,000 to 300,000 tonnes. Management believes tissue paper margins are approximately RMB 400 to 500 per tonne.

The bank also noted that Zhang Yin disclosed that South American forestry assets were acquired in her personal name several years ago as part of a long-term strategy to build a full industry chain platform spanning forestry, pulp, and papermaking. Due to the company's relatively high leverage during its previous capital expenditure cycle, these assets were not injected into the company. Management indicated that as the debt ratio declines, a future injection remains possible.

The company has resumed dividend payments, with a dividend per share of RMB 0.1 for fiscal year 2026, representing a payout ratio of 13%. The target is to resume regular dividend payments starting from fiscal year 2027 ending in June next year, with a payout ratio above 20%.

The debt ratio stood at 67.6% in fiscal year 2026, and management targets reducing it to 50% in fiscal year 2027 and 30% over the long term.