Principally engaged in manufacturing and trading of containerboard — corrugating medium and linerboard and corrugated packaging — corrugated paper boards and carton boxes.

Business Review - For the year ended December 31, 2009

In the first quarter of 2009, the weak global economy and sharply lower demand for consumer goods from the EU and the US resulted in a very difficult operating environment. Through the Chinese government’s stimulus package however, the Group achieved growth in domestic sales in the second quarter, offsetting the impact of the decline in the EU and US markets.

The Group’s strategic decisions in recent years have allowed our domestic sales to expand rapidly this year. Our products are strategically integrated from the upstream (containerboard) to the downstream (corrugated packaging) and we can adjust in a flexible manner our sales and develop a diversified customer network. We are developing businesses outside of Guangdong Province and are strengthening production processes and product quality supervision to improve production efficiency, raise utilization and reduce production wastage. Our fully integrated business model can deliver fully our competitive advantages in an environment of economic volatility and provide high quality, one stop shop services to customers with our outstanding corrugated packaging products.

In the first half of 2009, the utilization of the Group’s upstream (linerboard and medium) and downstream (boxes and boards) lines came to only 53% and 70%. Utilization in the second half came to 77% and 88% for the upstream and downstream businesses, putting overall utilization for the year at 65% and 79%, respectively.

In 2009, upstream sales accounted for 14% of total sales while downstream sales accounted for 86%, against 4% and 96%, respectively, in 2008. This sales mix is adjusted by the Group depending on market pricing and demand changes, and demonstrates the flexibility of our integrated approach. Product pricing fell sharply after the financial crisis in 2008, with average selling prices falling by nearly 40% in the first half of 2009. A recovery in both volume and pricing in the third quarter however meant that overall 2009 average selling prices fell by nearly 30% only in 2009.

The sales mix tilted more towards domestic customers compared to export customers in 2009 (45% vs 55%, respectively, against 25% and 75% in 2008). Although average selling prices fell, domestic sales still rose by 30% year on year in 2009 while export sales fell 26%. This showed that the Chinese government’s stimulus package helped raise domestic sales to offset the impact of falling exports. This also showed the ability of the Group to defend itself against economic volatility.

Facing a volatile economic environment, our Group has minimized inventories and tightened credit controls. This resulted in the Group maintaining a bad debts ratio that is close to zero. Strong support from our principal bankers allowed us to complete Phase 2 of the Qingyuan power plant in the year, and added one downstream production line, corrugated box production lines and printing machines. With our stable leverage policies to reduce risk, our debt ratios remain conservative.

Source: Hop Fung (02320) Annual Results Announcement