Investors Embrace Trees to Tap China Boom
Date: 19-Nov-07
Country: CHINA
Author: Alison Leung
China is the world's largest importer of soft and hard woods. Total forest product imports more than tripled between 1997 and 2005 to 134 million cubic metres, accounting for around half the log exports from Papua New Guinea, Myanmar, Indonesia and Russia.
But with campaigns against deforestation prompting tighter rules on international trade, a handful of listed logging firms are looking to exploit China's 960 million hectares (9.6 million sq km) of forests, of which only 5 percent is in plantation use.
The fledgling industry is planting fast growing, high-yield trees such as eucalyptus to feed demand from explosive growth in home ownership and construction -- and trying to soothe investors by battling accusations it is harming the environment by using timber taken illegally or unsustainably from the world's forests.
China's insatiable demand for raw materials has helped push up the price of commodities from iron ore and palm oil to copper and milk powder and wood products are no different. Benchmark NBSK pulp prices have risen more than 30 percent in two years.
Analysts say firms such as Temasek-invested Sino-Forest Corp and China Grand Forestry Resources Group can cash in on rising demand and tighter supply.
"With China's significant imbalance of wood supply, upstream players should benefit from rising wood prices," said Chuan Tang, an analyst at Deutsche Bank.
China Grand Forestry, which transformed itself from a garments maker formerly called Good Fellow Group, has seen its market value balloon nearly 18 times since the beginning of 2006, when it announced the purchase of Beijing Wan Fu Chun Forest Resources Development Co Ltd.
"Despite early scepticism, the market now recognises that the company's earnings model is sound," HSBC's Ken Ho said in a research report.
China Grand signed an agreement with Lee & Man Paper last month to supply the container board maker's pulp facilities in China with raw materials from its fast-growing, genetically modified paper mulberry trees.
China Grand also agreed this week to pay US$820 million for Yunnan Shenyu New Energy, a Chinese company that plans to make biodiesel from Jatropha Curcas trees.
DODGY LOGS?
But some analysts say investing in Chinese forestry firms is risky, as they are small and could be hit by unpredictable changes in government policy -- common for any nascent industry.
China is just beginning to regulate its forestry industry and detailed laws are lacking in many areas.
"They're mainly small-caps and investors may see difficulties when they want to offload the stocks," said Alex Tang, a research director at Core Pacific-Yamaichi International.
There is also the risk the highly cyclical pulp and timber markets fall, denting what forestry firms can get for their logs.
Chinese companies also face competition for forestry assets from both global timber operators and pension funds, which view growing trees as a good match for their long-term liabilities.
The world's top paper and board producer Stora Enso, which began the development of plantations in China's Guangxi province in 2002, has plans to plant a 160,000 hectare forest to support the establishment of a pulp and paper/board mill in the province, boarding Vietnam. It spent US$37 million buying suitable land for a mill in April.
Morgan Stanley singled out Sino-Forest among its best China materials plays, initiating coverage of the Chinese forestry and paper industry with an attractive view.
"Not only do we forecast demand growth for industrial wood to be robust for many years, but China's dependence on increasingly scarce imported wood should ensure strong pricing power of at least 10 percent per year through the end of the decade," Morgan Stanley's Charles Spencer wrote recently.
Apart from more established names such as Sino-Forest, a clutch of up-and-coming producers is getting in on the act.
At least half a