Thinking outside the box

Remaining calm under pressure is how Lee and Man negotiated the financial crisis.
Clement Chan, Lee and Man Paper.
Clement Chan, Lee and Man Paper.

Most manufacturers have it tough during recessions, as inventories become a burden, sales fall and pricing pressure intensifies.

But the tough conditions can sometimes favour bigger players, particularly if they react quickly. Take Lee and Man Paper Manufacturing, one of the largest containerboard producers in China. Its balance sheet is healthy thanks to a combination of pricing power, a green marketing message and prudent financial management.

“We came out of the financial crisis in good shape,” said Clement Chan, group vice president of Lee and Man. “Our top priority was to reduce our debt because our gearing ratio was slightly too high. In fiscal year 2010 we successfully reduced it by HK$1.5 billion ($192 million) and our gearing ratio came down to 64% from 84%.”

At a time when environmental protection is in vogue among China’s growing middle class, Lee and Man’s eco-friendly credentials represent good marketing — and good strategy. As the government clamps down on its more polluting competitors, Lee and Man stands to profit.

“The pie is getting bigger and the highly polluting small mills will eventually be phased out by the government if they do not improve, giving us more opportunities,” Chan said.

Lee and Man commands about 10% of the 40 million tonne containerboard market in China and runs four manufacturing mills; two in Dongguan and one each in Jiangsu and Chongqing, and has a fifth under construction in Jiangxi. With a total of 13 manufacturing machines in all locations, the company can produce up to 4.55 million tonnes of containerboard a year.

The firm touts its environmental credentials by buying waste paper, or old corrugated cardboard (OCC) as it is known in the industry, as the main material input for its products. Indeed, 97% of its input material is recycled paper, according to Chan. “We have laid a very good foundation in each of our mills, each with its own logistics pier and coal-fired power plant. In terms of energy saving, emission reduction and waste-water treatment, we are among the best in the industry so we consider ourselves good corporate citizens.”

The company’s position in China’s containerboard market is part of the reason it managed to stay profitable during the global financial crisis. While OCC costs went up, Lee and Man passed that increase downstream, by virtue of its position in the industry and its pricing power, Chan explained.

Working capital management essential to success

 A successful business model was just one of several factors that allowed Lee and Man to come out of the global financial crisis in fine fettle. Reducing debt was another initiative for the company, as was controlling the working capital cycle, which was reduced from 150 days in 2008 to roughly 100 days in

2010. “We shortened the working capital cycle and made it leaner,” said Chan. “A major contributing factor was the reduction of OCC inventory because in the past we used to make sure there was a lot of stock. The global financial crisis has taught us not to take any unnecessary risks, so we now only stock at the optimal level to ensure smooth production.”

The lessons learned about overstocking were hard ones though. For the six-month period starting April 2008, Lee and Man reported earnings of HK$670 million, which according to Chan was “not bad at all”. But by the end of the financial year reported earnings fell to HK$300 million, as the average selling price of cardboard fell to $270 a tonne from $386 in the second half of 2009. Overstocking wasn’t optimal as prices dropped.

With four months of inventory going for a song, the company took major accounting losses.

However, at the same time, raw material costs also fell dramatically, to $70 a tonne from $200 in a matter of weeks. The company’s response was two-pronged: sourcing additional OCC at the low price of $70 a tonne while selling containerboard product at $270, which helped to balance out its losses and keep the cash flowing in. It is a “beautiful” business model, said Chan.

Beautiful as it might be, Chan reckons Lee and Man needs a bigger slice of the pie to continue growing, which is creating pressure for it to tap new product markets — while staying environmentally friendly at the same time.

A new market

“We will begin to diversify to higher-end paper grades to meet the increasing market demand in China. For our business to be bigger, better and stronger we need to think outside of just the containerboard market.”

The need to secure growth is making Lee and Man seek new partners. It forged a financial-cum-strategic alliance last year with Japanese major, the Nippon Paper Group. As a result of the alliance Lee and Man has started producing high-end consumer packaging that is also recyclable, a product in which Nippon Paper has more than 30 years’ experience. This gives Lee and Man an additional 10 million tonne product market to tap into, and invaluable exposure to Nippon Paper’s experience in a further dozen paper grades, that is also in keeping with its green bonafides.

Prudent working capital and supply chain management, have been central to Lee and Man’s success. “We are a good operator and excellent in every function along the supply chain, and our strategy going forward is to focus on what we are good at and leave everything else alone,” said Chan.


This story was first published in the February 2011 issue of FinanceAsia magazine. 

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