Cautious outlook remains

The Chinese containerboard industry logged no surprises in productprices in 2H15, a result of stagnate demand which is likely to continue in2016. Improvement potential for supply is relatively more likely amid theclosure of inefficient mills, though the scale might be less significant as inGuangdong in 1H15, and new supply remains a risk. We raise ourearnings forecasts and target prices for both NDP (from HK$4.40 toHK$5.20) and LMP (from HK$4.90 to HK$5.10) on the recent decline inimported OCC costs but we remain cautious on the outlook for the sector.We still prefer LMP over NDP on better profitability, a stronger balancesheet and a more attractive valuation, despite NDP likely to log strongerearnings growth in FY16CL from a low base.

2H15: no price surprises amid sluggish demandq

Entering the traditional peak season of 2H15, we observed no major improvementin terms of end product demand given a sluggish retail market.q

On supply, the closure of small mills in Guangdong in 1H15 did improve the picture,but the majority of the impact on price was digested in 1H15.

After the price decline in August-September, there were some price hike attempts,though unsuccessful, and did not fully compensating the previous decline.

2016: more improvement potential on supplyq

In 2016, we do not see substantial improvement in downstream demand given alikely further slowdown in the overall economy. We expect the low-single-digitgrowth in demand to continue in 16CL, growing c.2.1%, after c.2.7% in 15CL.q。

Comparatively, we see more upside potential on supply given the long-termdirection to close small plants on environmental concern, despite scale possiblybeing less than Guangdong. Financial strength of local governments is a limitation.

Risk from new supply remains, especially in 2017 where potentially more peers areadding capacity again.。

Falling costs is positive, but not foreverq。

A positive move recently is the falling imported OCC cost, likely a result of decliningpurchases by Chinese paper manufacturers amid Rmb depreciation.

This cannot last forever, as domestic waste paper prices are likely to increasebecause of the increased purchases. Rmb depreciation would also reduce thebenefits from the decline in the imported OCC costs itself.。

Raising forecasts but stay cautious

We raise our earnings forecasts for Chinese containerboard names to factor in thedecline in imported OCC costs, but slightly lower our ASP assumptions.

NDP: We raise our FY16/17/18CL core profit forecasts 22.2%/18.7%/11.3%. Weraise our target from HK$4.40 to HK$5.20 based on an unchanged 10x FY17CL PE.

LMP: We raise our FY15/16/17CL core profit forecasts 2.9%/4.0%/2.2%. We raiseour target from HK$4.90 to HK$5.10, also based on an unchanged 10x FY16CL PE.