<strong>China: Future Worked out on Back of a Cigarette Packet</strong>

Source from:  South China Morning Post 06/21/2013

The planned listing in Hong Kong of Jin Cai, a maker of cigarette packaging based in Jiangxi, offers investors access to the government-protected tobacco industry and deeply embedded social practices.

While the firm has a stable source of income from the state-owned tobacco producers, its operating margin and profitability have dropped for three years in a row since the government imposed a nationwide ban on smoking indoors in public areas.

The gearing ratio, a measure of financial leverage, rose steadily to 19.8 per cent last year from 14 per cent in 2010 as the firm used bank loans to boost working capital while it battled with sluggish sales and delays in payment by its customers.

Raw materials in inventory jumped to 4.5 million yuan (HK$5.7 million) last year from 2.9 million yuan in 2011, while finished goods plunged to 1.8 million yuan from 14.5 million yuan as the firm tried to destock in the face of sales growth of just 2.1 per cent last year.

Net profit slumped 13.9 per cent, Jin Cai's preliminary listing document shows. Profitability measures, including net profit margin and return on equity, have declined steadily since 2010.

The firm said it was battered by a "decrease in average selling price" and "increase in production costs".

Jin Cai has kicked off its listing roadshow in an attempt to raise US$100 million. It plans to use the fresh capital to expand production capacity and seek vertical integration opportunities, suggesting that it might seek to acquire operations engaged in the manufacturing of transfer paper, a raw material used in cigarette package printing.

The firm does not have a clear future payout policy, and no dividend has been paid since its incorporation.

Eugene Law, a director at Galaxy Securities International, said the lacklustre stock market has added mounting pressure on listing hopefuls at a time when sentiment and demand for new shares remain extremely low after the US Federal Reserve said it would gradually taper off its bond-buying programme from some time in the second half of this year.

Six out of 10 newly listed firms in Hong Kong fell below their offering prices this year. Bankers said market conditions were "extremely tough", blaming the move by authorities in the US to taper quantitative easing and Beijing's crackdown on shadow banking for triggering a liquidity crunch.

The city's Hang Seng Index is the worst performer in the region, falling 10 per cent so far this year.

Law said: "Some fund managers are prohibited from placing orders for the so-called sin stocks, companies in the gambling, tobacco and alcohol sector - even though the returns of those firms could be very lucrative, because of their countercyclical nature."

Beijing's crackdown on the "gift giving" culture will mean further pain for makers of consumer discretionary products such as baijiu (white liquor) and cigarettes.

The administration of President Xi Jinping has ordered an end to extravagant official banquets, where drinking and smoking are prevalent.

The mainland has more than 350 million smokers, and smoking and the giving of cigarettes as gifts have long been an important part of the culture.

Cigarettes began to have an added cachet after top Chinese leaders such as party chairman Mao Zedong and the late reformer Deng Xiaoping became famous as heavy smokers.

Both men always had their cigarettes with them when greeting visitors and attending official meetings. Enditem