Orient Paper Inc. Announces First Quarter 2011 Results

BAODING, Hebei, China, May 10, 2011 /PRNewswire-Asia-FirstCall/ -- Orient Paper, Inc. (AMEX: ONP) ("Orient Paper" or the "Company"), a leading manufacturer and distributor of diversified paper products in northern China, today announced financial results for the first quarter ended March 31, 2011.

First Quarter 2011 Highlights

• Revenue increased 25.6% year-over-year to $33.2 million
• Gross profit increased 60.6% year-over-year to $7.8 million, with gross margin of 23.4%
• Operating income rose 55.5% year-over-year to $6.8 million
• Operating margin increased to 20.6% from 16.6% in the first quarter of 2010
• Net income increased 55.2% year-over-year to $4.9 million, or $0.26 per fully diluted share

"Our double digit growth in revenue and net income during the first quarter of 2011 was largely due to higher selling prices resulting from factors related to inflation on commodity costs in China and strong market demand and a supply shortage caused by the government-mandated closure of smaller paper manufacturers in the second half of 2010," commented Mr. Zhenyong Liu, Chairman and Chief Executive Officer of Orient Paper. "In addition, our new digital photo paper product sales demonstrated robust year-over-year growth driven by our competitive pricing strategy and sales and marketing efforts. Our digital photo paper line is now operating at over 100% of the original estimated production capacity," added Mr. Liu.

First Quarter 2011 Financial Results

For the quarter ended March 31, 2011, revenue was $33.2 million, an increase of 25.6% from $26.5 million during the same period in 2010. The significant increase in revenue was primarily attributable to strong market demand and higher average selling price (ASP) for the Company's medium-grade offset printing paper and corrugating medium paper.

Due to the loss of an old corrugating medium paper production line since June 2010 to make room for the new production line under construction, revenue from corrugating medium paper amounted to $8.5 million in the first quarter of 2011, representing a decline of 10.5% compared to $9.5 million in the year ago period. Despite a decrease of 9,139 tons in total quantity sold, ASP for corrugating medium paper rose 26.6% from $304/ton in the first quarter of 2010 to $385/ton in the first quarter of 2011 as a result of increasing customer demand and regional shortage in supply of paper products, caused by government mandated closures of other smaller paper manufacturers.

Revenue from medium-grade offset printing paper was $22.5 million for the three months ended March 31, 2011, up 36.0% from $16.6 million for the comparable period in 2010. The ASP of offset printing paper products increased 12.3% from $700/ton in the first quarter of 2010 to $786/ton in the first quarter of 2011. As of March 31, 2011 Orient Paper still had four offset printing paper supply agreements which are in effect until June 30, 2011. During the first quarter of 2011, the Company recorded $6.6 million in revenue from sales of offset printing paper finished goods purchased from these vendors.

Revenue from the Company's new digital photo paper products which have been introduced since March 2010 was $2.2 million, or 6.5% of total revenue during the first quarter of 2011. In the first quarter of 2011, the Company sold a total of 527 tons of digital photo paper, slightly lower than 544 tons in the fourth quarter of 2010 because of the extended holiday breaks for the Chinese New Year in February.

Gross profit increased 60.6% to $7.8 million compared to $4.8 million for the first quarter of 2010, mainly driven by significant increase in ASPs of the Company's corrugating medium paper and offset printing paper products. Overall gross margin was 23.4% as compared to 18.3% in the same period last year, due to over 26% and 12% increase in ASPs of corrugating medium and offset printing paper, respectively, higher gross profit margin contribution from the Company's new digital photo paper products, and lower unit costs for electricity and coal which were partially offset by higher purchase costs for the recycled paper raw materials. Gross margin on sales of purchased finished goods of offset printing paper was 6.5% in the first quarter of 2011, substantially lower than the gross profit margin of total offset printing paper products produced and sold during the quarter.  Gross profit contributed by the sales of such purchased finished goods was $0.79 million for the first quarter of 2011.

Selling, general and administrative expenses ("SG&A") were $0.9 million, an increase of 95.8% from $0.4 million in the first quarter of 2010. The increase in SG&A expenses was primarily attributable to professional service fees incurred in connection with the independent investigation into certain false allegations against the Company during the second half of year 2010.  

Operating income increased 55.5% to $6.8 million, or 20.6% of the revenue, from $4.4 million, or 16.6% of the revenue, in the first quarter of 2010.

Net income was $4.9 million, up 55.2% from $3.1 million in the same period last year. Basic and diluted earnings per share for the first quarter of 2011 were $0.26 compared to $0.21 for the same period a year ago. Weighted average shares used in the calculation of diluted earnings per share were 18,346,722 in the first quarter of 2011 compared to 14,893,712 in the first quarter of 2010, due to additional shares issued during the Company's public offering financing in April 2010.

Financial Condition

As of March 31, 2011, Orient Paper had $11.7 million in unrestricted cash, as compared to $11.3 million at the end of 2010. Working capital was $11.0 million at the end of March 31, 2011. The Company had $3.0 million in short-term debt as well as $3.7 million in long term debt. As of March 31, 2011, shareholders' equity totaled $107.1 million compared to $101.5 million at the end of 2010.

In the first quarter of 2011, Orient Paper generated net cash flow from operating activities of $8.6 million, representing an increase of $4.9 million, or 135.0%, from $3.7 million for the comparable period in 2010.  The Company used $5.8 million in cash to pay for new property, plant and equipment (mostly related to the construction of the new 360,000 tons per year corrugating medium paper production line) and $4.0 million in cash to pay off two bank loans that became due. A new $1.5 million loan was borrowed from a credit union after the pay off of the aforementioned two loans.

Business Outlook

The equipment installation of the new 360,000 tons per annum corrugating medium paper production line has been slowed down by procedures to realign the precision of various parts of the equipment caused by an invisible shift in the foundation. Since the realignment is now under control, we expect the installation to be completed by the end of June 2011 and commercial production to begin in the early third quarter of 2011. With the addition of this production line, the Company's total annual production capacity will increase from 248,000 tons to 608,000 tons and corrugating medium paper production capacity will increase over 200%. With the new capacity, we expect to be ranked in the top 30 Chinese paper manufacturers by the end of the year.

We expect macro-economic inflation and the paper industry consolidation to continue throughout the rest of the year.  Both factors have the effect of pushing paper product ASPs higher. Although raw material costs may rise, we believe we should be able to at least stabilize, if not further grow, the gross profit margin of our paper products, as we take advantage of domestic recycled paper as feed stock, whose price tends to be less volatile as compared to imported recycled cardboards.

Our digital photo paper business has experienced substantial growth since commencement of operation and is building a backlog of sales orders. We have been working to renovate a small production line, which has been idle since 2007, to produce digital photo base paper. If the production line, which can also be used to produce other high gross profit margin specialty papers, is successfully renovated in the next three-to-six months, the gross profit margin of our digital photo paper will be further enhanced.

Due to the delay in the commercial production of its new corrugating medium paper production line and adjustments for anticipated inflation on its production costs and selling prices, the Company recently revised its 2011 guidance to revenues of between $172 million and $190 million, gross profit of between $35 million and $38 million, net income of between $22 million and $25 million, and basic and diluted earnings per share of between $1.22 and $1.35. We now expect total corrugating medium paper production to reach between approximately 220,500 tons and 199,500 tons, of which up to 98,000 tons are contributed by the new production line.

Mr. Liu concluded, "We anticipate that we will continue to benefit from the regional supply shortage and growth of the Chinese economy for the rest of the year. Like many other industries, the inflation issue is a challenge for the Chinese paper industry as a whole. However, we believe that our bargaining power and our business model protect our bottom line from being negatively affected by inflation. In addition, we look forward to beginning trial production of our new 360,000-ton corrugating medium paper production line in June 2011, which will facilitate our market expansion in northern China and further strengthen our leading market position."

Conference Call

The Company will host a conference call at 9:00 a.m. Eastern Time on Wednesday, May 11, 2011, to discuss the 2011 first quarter financial results.

To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: +1 866 395 5819. International callers should dial +1 706 643 6986. The conference call ID number is 65364998.

If you are unable to participate in the call at this time, a replay will be available starting on Wednesday, May 11, 2011 at 10:00 a.m. Eastern Time, through Wednesday, May 25, 2011. To access the replay, dial +1 800 642 1687. International callers should dial +1 706 645 9291. The conference ID number for the replay is 65364998.

This conference call will be broadcast live over the Internet and can be accessed by all interested parties by clicking on http://www.orientpaperinc.com/. Please access the link at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software. For those unable to participate during the live broadcast, a 90-day replay will be available shortly after the call by accessing the same link.

About Orient Paper, Inc.

Orient Paper, Inc., through its wholly owned subsidiary, Shengde Holdings, Inc., controls and operates Baoding Shengde Paper Co., Ltd. ("Baoding Shengde"), and Hebei Baoding Orient Paper Milling Co., Ltd ("HBOP"). Founded in 1996, HBOP is engaged in the production and distribution of products such as corrugating medium paper, offset printing paper, and other paper and packaging-related products in China. The Company uses recycled paper as its primary raw material. Baoding Shengde, founded in June 2009 located in Baoding, is engaged in the production and distribution of digital photo paper. As one of the largest paper producers in Hebei Province, China, HBOP is strategically located in Baoding, a city in close proximity to Beijing where the majority of publishing houses are based. Orient Paper is led by an experienced management team committed to diversifying the Company's product offering and delivering tailored services to its customers. For more information, please visit http://www.orientpaperinc.com.

Safe Harbor Statement

This announcement contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in this announcement are forward-looking statements, including but not limited to, any projections of the Company's FY 2011 financials, earnings, revenue, margins or other financial items; the actions and initiatives of current and potential competitors; the Company's ability to introduce new products; the Company's ability to implement the planned capacity expansion of corrugating medium paper; market acceptance of new products; general economic and business conditions; the ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed in the Company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the companies and the industry. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, it cannot assure you that its expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results.

– Financial Tables Follow –