Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ONP > SEC Filings for ONP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ORIENT PAPER INC.

Form 10-Q for ORIENT PAPER INC.


8-Nov-2012

Quarterly Report


Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation

Cautionary Notice Regarding Forward-Looking Statements

The following discussion of the financial condition and results of operation of the Company for the three and nine months ended September 30, 2012 and 2011 should be read in conjunction with the selected financial data, the financial statements, and the notes to those statements that are included elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.

In this quarterly report, references to "Orient Paper," "ONP," "the Company," "we," "our," "us," and the Company's variable interest entity, "HBOP," refer to Orient Paper, Inc.

We make certain forward-looking statements in this report, including information with respect to our plans and strategy for our business and related financing and include forward-looking statements that involve risks and uncertainties. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can", "could," "may," "should," "will," "would," and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash. Please refer to the section entitled "Liquidity and Capital Resources" contained in this Report for additional discussion. Please also refer to our other filings with the Securities and Exchange Commission. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

Results of Operations

Comparison of the Three Months Ended September 30, 2012 and 2011

Revenue for the three months ended September 30, 2012 was $37,651,354, an increase of $576,595 or 1.56% from $37,074,759 for the same period in the previous year.

Revenue of Offset Printing Paper and Corrugating Medium Paper

Revenue from sales of offset printing paper and corrugating medium paper for the three months ended September 30, 2012 was $35,795,860, an increase of $691,952 or 1.97% from $35,103,908 for the comparable period in 2011. The increase was the result of a number of favorable and unfavorable factors, including: (1) an increase in sales of corrugating medium paper as we ramp up the production of the new 360,000 tonnes/year new production line ("New Production Line") during the quarter ended September 30, 2012, (2) a decrease in revenue caused by the suspension of trading activities of offset printing paper since the quarter ended March 31, 2012, and (3) decreases in Average Selling Prices ("ASPs") for 12.11% and 14.01% for corrugating medium and offset printing paper, respectively, during the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Total offset printing and corrugating medium paper sold during the three months ended September 30, 2012 amounted to 83,251 tonnes, an increase of 27,609 tonnes or 49.62%, compared to 55,642 tonnes sold in the comparable period in the previous year. We did not sell any finished goods that we purchased from other manufacturers during the three months ended September 30, 2012 because of the downward pricing pressure which squeezed the profit margin of the trading activities since January 2012. As a comparison, during the three months ended September 30, 2011, we sold 6,089 tonnes of offset printing paper (or 20.68% of total printing paper sold for that quarter) purchased from other manufacturers for a revenue of $5,038,357.

During July, August and September 2012, we produced and sold 16,532 tonnes, 9,376 tonnes, and 21,183 tonnes, respectively, of corrugating medium paper from the New Production Line that we launched in December 2011. With the 47,091 tonnes produced by the new production line, total quantity of corrugating medium paper sold during the quarter ended September 30, 2012 was 66,956 tonnes, an increase of 40,967 tonnes or 157.63% from 25,989 tonnes in the comparable period in the previous year. The changes in revenue dollar amount and in tonnage from the quarter ended September 30, 2011 to the same period in year 2012 are summarized as follows:

                     Three Months Ended                   Three Months Ended               Change in                                    Percentage
                     September 30, 2012                   September 30, 2011                                                              Change
Sales
Revenue         Qty.(Tonne)          Amount          Qty.(Tonne)          Amount          Qty.(Tonne)           Amount             Qty.           Amount
Corrugating
Medium
Paper                 66,956      $ 24,284,627             25,989      $ 10,742,793              40,967      $  13,541,834          157.63 %        126.06 %
Offset
Printing
Paper                 16,295      $ 11,511,233             29,653      $ 24,361,115             (13,358 )    $ (12,849,882 )        -45.05 %        -52.75 %
Total
Corrugating
Medium and
Offset
Printing
Paper Sales
Revenue               83,251      $ 35,795,860             55,642      $ 35,103,908              27,609      $     691,952           49.62 %          1.97 %

Monthly sales revenue, including revenue from the sales of purchased paper finished goods and excluding revenue of digital photo paper, for the 21 month period ended September 30, 2012, are summarized below. Monthly sales in February 2011, January 2012 and February 2012 were substantially lower than average mainly because of the extended Chinese New Year Holiday in both 2012 and 2011. Monthly sales in April and May 2012 were lower due to a suspension of production caused by a malfunction in the water treatment plant. Sales in August 2012 were also lower because of the interruption of production by the installation of the new boiler.

[[Image Removed]]

The ASPs for our main products in the three-month periods ended September 30, 2011 and 2012 are summarized as follows:

                                                               Offset           Corrugating
                                                              Printing         Medium Paper
                                                              Paper ASP             ASP
Quarter ended September 30, 2011                            $         821     $           413
Quarter ended September 30, 2012                            $         706     $           363
Decrease from comparable period in the previous year        $        (115 )   $           (50 )
Decrease as a percentage                                           -14.01 %   $        -12.11 %

The following is a chart showing the month-by-month ASPs (excluding the ASPs of the digital photo paper) for the 21-month period ended September 30, 2012:

[[Image Removed]]

Corrugating Medium Paper

Revenue from corrugating medium paper amounted to $24,284,627 (or 67.84% of total offset printing paper and corrugating medium paper revenue) for the three months ended September 30, 2012, representing a $13,541,834 (or 126.06%) increase over the corrugating medium paper revenue of $10,742,793 for the comparable period in 2011. We sold 66,956 tonnes of corrugating medium paper for the three months ended September 30, 2012 as compared to 25,989 tonnes for the same period in 2011, representing a 157.63% increase in quantities sold. Despite the increase in sales quantity, ASP for corrugating medium paper dropped from $413/tonne for the three months ended September 30, 2011 to $363/tonne for the three months ended September 30, 2012, representing a 12.11% decrease over the comparable period. The decline in the ASP appears to be a result of the economic slowdown throughout China, as manufacturing activities contracted due to the crisis in Europe as well as the Chinese government's effort to cool off the domestic construction activities. According to a report from China Industry Research Report Network, paper ASPs in China may continue to stay low for the coming periods. Although we predict that ASPs for packaging paper may see a seasonal upward adjustment in the fourth quarter of 2012 for the upcoming holiday season in December and January, we believe the ASP for the corrugating medium paper will not fundamentally improve at least until the first quarter of year 2013, or until the Chinese government announces new economic policies to stimulate domestic economy and consumer spending.

We launched the New Production Line in December 2011. Quantities sold from the commencement to September 2012 are as follows.

[[Image Removed]]

We are in the process of ramping up the new production line. Currently, the production speed is limited by the steam pressure at the drying section of the production line. We installed a new 75 tonnes/hour boiler in August 2012 and expect the machine speed will significantly improve. For the month of September 2012, we produced 21,752 tonnes of corrugating medium from the new production line, representing a run rate of 72.51% of the monthly design capacity. We project that annual production quantity from the New Production Line will be approximately 180,000 tonnes for the year of 2012.

Offset Printing Paper

Revenue from offset printing paper amounted to $11,511,233 (or 32.16% of total offset printing paper and corrugating medium paper revenue) for the three months ended September 30, 2012, which represents a $12,849,882 (or 52.75%) decrease from the offset printing paper revenue of $24,361,115 for the comparable period in 2011. We sold 16,295 tonnes of offset printing paper in the quarter ended September 30, 2012 compared to 29,653 tonnes of offset printing paper in the comparable period in year 2011, a decrease of 13,358 tonnes or 45.05%. We believe that the factors contributing to the decrease in both total quantity and dollar amount sold in the three months ended September 30, 2012 include (1) the decrease in ASP for offset printing paper products from $821/tonne in the quarter ended September 30, 2011 to $706/tonne in the quarter ended September 30, 2012, representing a decrease of 14.01%; (2) a softening demand for printing paper in our region, possibly due to a slow economy, (3) the suspension of offset printing paper trading activities, as explained above, and (4) production interruption in the month of August 2012 due to the installation of the new boiler. Because of shrinking gross profit margin of the trading activities caused by the decrease in offset printing paper ASP, we decided to temporarily suspend offset printing paper trading after January 2012. Gross revenue from trading of offset printing paper finished goods is nil for the three months ended September 30, 2012, while gross revenue from trading of offset printing paper finished goods was $5,038,357 (or 6,089 tonnes) for the comparable period in 2011 and accounted for 20.68% of the gross revenue of offset printing paper for that quarter.

Revenue of Digital Photo Paper

Revenue generated from selling digital photo paper was $1,855,494 (or 4.93% of total revenue) for the three months ended September 30, 2012, a decrease of $115,357 or 5.85% from $1,970,851 (or 5.32% of total revenue) for the three months ended September 30, 2011. When comparing to the quarter ended September 30, 2011, the ASP of our digital photo paper decreased from $3,975/tonne to $3,865/tonne. We sold 480.13 tonnes of digital photo paper in the three months ended September 30, 2012, as compared to 495.77 tonnes in the same period a year ago. The 3.15% year-over-year decline in quantity sold and the 2.77% year-over-year decline in ASP appear to be a result of softening customer demand in a weak economy. We believe the market demand and the ASP may not fully recover until the first half of year 2013, or until fundamental changes in the PRC domestic economy take place.

We currently produce glossy and semi-matte photo paper in various weights (from 120g/m2 to 260g/m2). Although there are minor seasonal fluctuations, we have not significantly adjusted down the ASP of our digital photo paper since the second quarter of year 2011. However, because of the depressed domestic economy, we believe there will still be market pricing pressure on digital photo paper in the near future. Digital photo paper products' monthly ASPs, monthly sales quantity (in tonnes) and monthly sales revenue for the 21 months from January 2011 to September 30, 2012 are summarized as follows:

[[Image Removed]]

[[Image Removed]]

[[Image Removed]]

Cost of Sales

Corrugating Medium Paper and Offset Printing Paper

Total cost of sales for corrugating medium paper and offset printing paper for the three months ended September 30, 2012 was $29,436,244, an increase of $1,693,264 or 6.10% from $27,742,980 for the comparable period in 2011. The increase in total cost of sales in the third quarter of year 2012 is primarily due to the increase in sales volume of corrugating medium paper in the quarter ended September 30, 2012 compared to the comparable period in 2011. As explained above, total sales revenue (excluding revenue from sales of digital photo paper) increased from $35,103,908 in the quarter ended September 30, 2011 to $35,795,860 in the comparable period in year 2012, representing a 1.97% year-over-year increase. Cost of sales for total corrugating medium paper amounted to $19,689,569 for the quarter ended September 30, 2012, as compared to $7,779,019 for the same period in 2011. The $11,910,550 increase in corrugating medium paper cost of sales was further offset by a reduction in offset printing paper cost of sales. Changes in cost of sales and cost per tonne by product for the three-month periods ended September 30, 2012 and 2011 are summarized below:

               For the Three Months      For the Three Months
                       Ended                     Ended
                September 30, 2012        September 30, 2011             Change in         Percentage Change
                                                                                                  in
                                Cost                      Cost                      Cost              Cost
                                 per                       per                       per   Cost of     per
               Cost of Sales    tonne    Cost of Sales    tonne    Cost of Sales    tonne   Sales     tonne
Corrugating  $    19,689,569 $     294 $     7,779,019 $     299 $    11,910,550 $     (5)  153.11 %  (1.67) %
medium paper
Offset       $     9,746,675 $     598 $    19,963,961 $     673 $  (10,217,286) $    (75) (51.18) % (11.14) %
printing
paper
Total
corrugating
medium and
offset
printing
paper        $    29,436,244       n/a $    27,742,980 $     n/a $    1, 693,264 $     n/a    6.10 %     n/a

Digital Photo Paper

Total cost of sales of digital photo paper amounted to $1,395,057 for the three months ended September 30, 2012, representing an increase of $57,413, or 4.29%, over the cost of sales of $1,337,644 in the comparable period in year 2011. The slightly increase is primarily due to additional cost of repairs and maintenance works charged to production cost in the third quarter of 2012. During the quarter ended September 30, 2012, repairs and maintenance included in digital photo paper cost of sales was in the amount of $69,112, as compared to $29,476 in the quarter ended September 30, 2011.

Monthly average purchase costs of our major raw materials for the period beginning January 2011 and ending September 2012 are as follows:

[[Image Removed]]

Costs for all types of raw materials in the first half of the 21-month period ended September 30, 2012 were generally on an upward trend and reached the highest point over the period toward the end of October 2011. Our average unit purchase costs (net of applicable value added tax) of recycled paper board, recycled white scrap paper, and recycled printed paper in the month of October 2011 were $204/tonne, $424/tonne, and $318/tonne, respectively. Starting from November 2011, the raw material prices have been declining, reflecting a softening demand from other paper producers in an economic slowdown. By the month of September 2012, the average unit purchase costs of recycled paper board, recycled white scrap paper, and recycled printed paper were $162/tonne, $365/tonne, and $271/tonne, respectively, which represent decreases of 21%, 14% and 15% from the prices in October 2011, respectively. Our production uses entirely domestic recycled paper (produced mainly from the Beijing-Tianjin metropolitan area, where 40% of the publishing companies are located) and do not have to rely on imported recycled paper, which tends to have a more volatile pricing behavior than the domestic recycled paper. Depending on the regional economic outlook for the rest of year 2012, we believe that the future waste paper raw material costs may continue to reflect weaker market demand.

Electricity and coal are the two main energy sources of our paper manufacturing activities. Coal prices have been subject to seasonal fluctuations in China, with peaks often occurring in the winter months. Historically, electricity and coal account for approximately 8% and 12% of our total cost of sales, or approximately 6% and 9% of total sales, respectively. However, as we ramp up the run rate of New Production Line, which is considerably more energy efficient, we expect to see the portion in sales and cost of sales represented by electricity and coal to decrease over time. The monthly energy costs (electricity and coal) as a percentage of total monthly cost of sales and sales of our main paper products for the 21 months ended September 30, 2012 are summarized as follow:

[[Image Removed]]

Gross Profit

Corrugating Medium Paper and Offset Printing Paper

Gross profit for corrugating medium paper and offset printing paper for the three months ended September 30, 2012 was $6,359,616, a net decrease of $1,001,312 or 13.60% from $7,360,928 for the comparable period in 2011. The net decrease in gross profit was primarily attributable to (1) the $319,973 gross profit in the third quarter of 2011 that was contributed by trading of offset printing paper purchased from third party suppliers, which has been discontinued since January 2012, (2) the 14.01% and 12.11% year-over-year declines in ASPs of our offset printing paper and corrugating medium paper explained in the discussion of changes in revenue above, and (3) a 6.10% year-over-year increase in cost of sales for offset printing paper and corrugating medium paper in the third quarter of 2012, versus a smaller 1.97% growth in sales. Because of declining ASPs, monthly gross profit margin of corrugating medium paper and offset printing paper generally has been decreasing since the beginning of 2012. For the three months ended September 30, 2012, our gross profit margins on corrugating medium paper and offset printing paper were 18.92% and 15.33%, respectively. The gross profit margins on corrugating medium paper and offset printing paper for the comparable period in 2011 were 27.59% and 18.05%, respectively.

Monthly Gross Profit Margins on the sales of our corrugating medium paper and offset printing paper for the 21-month period ending September 30, 2012 are as follows:

[[Image Removed]]

Digital Photo Paper

Gross profit from the sales of digital photo paper for the three months ended September 30, 2012 amounted to $460,437 or 24.81% as a percentage of total digital photo paper sales, compared with $633,207, or 32.13% as a percentage to total digital photo paper sales in the same period last year. The decline of gross profit margin is a direct result of both lower production quantity (and in terms of quantity sold, 3.15% less than the same period in 2011) and a lower ASP (2.77% lower than the ASP in the same period of previous year). The low ASP of digital photo paper reflects the contraction of the domestic consumption and business activities (including commercial advertising) since the beginning of year 2012. We believe that the Chinese economy may not fully recover to the pre-2012 level at least until the first half of 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2012 were $703,877, an increase of $242,565 or 52.58% from $461,312 for the comparable period in 2011. The increase was mainly attributable to (1) a difference in the balances of net gains on foreign currency transaction between the quarter ended September 30, 2012 and 2011 for $149,167, (2) increase in depreciation of dormitory buildings and land use rights amortization in the quarter ended September 30, 2012 for $76,836, and (3) increase in wages and salary in the quarter ended September 30, 2012 for $37,005 as compared to the same period in 2011.

Comparison of the Nine Months Ended September 30, 2012 and 2011

Revenue for the nine months ended September 30, 2012 was $107,582,025, a decrease of $4,252,339 or 3.80% from $111,834,364 for the same period in the previous year.

Revenue of Offset Printing Paper and Corrugating Medium Paper

Revenue of offset printing paper and corrugating medium paper for the nine months ended September 30, 2012 was $102,277,317, a decrease of $3,181,488 or 3.02% from $105,458,805 for the comparable period in 2011. The decrease was mainly caused by (1) the suspension since January 2012 of trading activities of offset printing paper that we purchased from other manufacturers, (2) a declining trend of product ASPs, (3) a temporary shutdown of the offset printing paper and corrugating medium production lines for 17 days beginning on April 22,2012 because of certain malfunction of the biological processing at our water treatment plants, and (4) interruption of production in August 2012 for the installation of boiler and the government inspection of our facilities. These negative impacts are offset in part by the sales revenue of the corrugating medium paper produced by our New Production Line launched in December 2011. For the nine months ended September 30, 2012, revenue attributable to the new production line amounted to $43,101,542.

Revenue from corrugating medium paper amounted to $64,905,678 (or 60.33% of total revenue) for the nine months ended September 30, 2012, representing a $34,611,741 (or 114.25%) increase from the corrugating medium paper revenue of $30,293,937 for the comparable period in 2011. We sold 170,731 tonnes of corrugating medium paper in the nine months ended September 30, 2012 compared to 75,141 tonnes sold in the same period in 2011, an increase of 95,590 tonnes or 127.21%. During the nine months ended September 30, 2012, 112,170 tonnes (or 65.70%) of corrugating medium paper sold were produced by New Production Line that we launched in December 2011. ASP for corrugating medium paper in the nine months ended September 30, 2012 dropped to $380/tonnes from $403/tonne (a $23 or 5.71% decrease) for the same period in 2011.

Revenue from offset printing paper amounted to $37,371,639 (or 34.74% of total revenue) for the nine months ended September 30, 2012, which represents a $37,793,229 (or 50.28%) decrease from the offset printing paper revenue of $75,164,868 for the comparable period in 2011. Our ASP for offset printing paper dropped to $737/tonne for the nine months ended September 30, 2012 from $806/tonne (a 8.56% decrease) for the nine months ended September 30, 2011. In addition to the sliding ASP, we sold 50,741 tonnes of offset printing paper in the nine months of 2012 compared to 93,210 tonnes for the same period in 2011, a decrease of 42,469 tonnes or 45.56%. The main reason for the decrease in quantity sold/produced is the decision to discontinue the trading activities of offset printing paper since January 2012, whereas revenue from such trading activities accounted for $20,876,513 (from 25,911 tonnes of paper sold) of total revenue for the nine months ended September 30, 2011. The operations of our offset printing paper production lines were also interrupted during April and August 2012 for maintenance of the water treatment plant and for installation and inspection of a new boiler. The declining ASP since the end of year 2011 also reflected a soft demand in the Chinese paper markets and fewer purchase orders for our paper products.

A summary of the above changes and further analyses of the changes in our sales revenue are as follows:

                            Nine Months Ended                   Nine Months Ended                       Change in                          Percentage
                           September 30, 2012                  September 30, 2011                                                            Change
Sales Revenue         Qty.(Tonne)         Amount          Qty.(Tonne)         Amount          Qty.(Tonne)         Amount          Qty.(Tonne)      Amount

Corrugating Medium
Paper                      170,731     $  64,905,678            75,141     $  30,293,937            95,590     $  34,611,741            127.21 %         114.25 %
Offset Printing
Paper                       50,741     $  37,371,639            93,210     $  75,164,868           (42,469 )   $ (37,793,229 )          -45.56 %         -50.28 %
Total Corrugating
medium and Offset
Printing Paper
Sales Revenue              221,472     $ 102,277,317           168,351     $ 105,458,805            53,121     $  (3,181,488 )           31.55 %          -3.02 %

Average ASPs for our main products in the nine-month periods ended September 30, 2011 and 2012 are summarized as follows:

                                                             Medium-Grade         Corrugating
                                                              Offset ASP        Medium Paper ASP
. . .
  Add ONP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ONP - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.