Sector: Paper & Forest Products Sector Weighting: Underweight
Don Roberts, Managing Director 613-564-0827 [email protected] World Newsprint Market: Winners And Losers
Asian Pulp And Paper Outlook Conference Sponsored By The China Paper Association And RISI Shanghai, China April 24, 2006
See "Important Disclosures" section See "Price Target Calculation" and "Key at the end of this report for important FOR INSTITUTIONAL CLIENT USE ONLY. Risks to Price Target" sections at the required disclosures, including end of this report, or at the end of each potential conflicts of interest. NOT FOR GENERAL DISTRIBUTION. section thereof, where applicable. Table of Contents
The Players………………………………………………………………………. 3
Winners & Losers: By What Criteria?
1. Financial Performance………………………………………………… 4
2. Regional Demand………………………………………………….…… 10
3. Regional Industries………………………………………………….... 18
4. Benefits From Trade……………………………………………….…. 22
5. Relative Costs…………………………………………………………… 27
6. “Broader Industry”………………………..………………………….. 36
Strategic Case Study: PanAsia…………………….……………………. 40
2 Who Are The Players? 15 Largest Global Newsprint Producers (2006)
6000
5000 Norske Skog e
4000 Abitibi-Consol Stora Enso i 3000 Bowater UPM-Kymmen r
2000 n Nippon Oji Capacity (000’s mt) (000’s Capacity White Birch Kruger Holme SP Newsprint Shandong Huata
1000 Catalyst Pape Myllykoski Kondopoga
0 Canada USA Europe Asia Other* * Other: Primarily Latin America & Australasia. Source: Canadian Paper Analyst, CIBC World Markets. • Norske Skog is the biggest, and most international…...big changes in 2005/6. • Increased presence in Asia with 100% stake in PanAsia, and exited North America with sale of stake in Catalyst. • Abitibi has fallen to second with sale of PanAsia stake. Still has large UGW capacity in North America. 3 • Shandong Huatai will jump from 12th to 8th in late 2007 – 1/3 increase. 1. Financial Performance
Share Prices Of Major Newsprint Producers (January 2000-March 2006) 160 Holmen (+53%)
140
120 Oji (+25%)
100 S&P (-11%) 80
(Jan.2000=100) Norske (-29%) 60 Stora (-29%)
40 Bow ater (-45%)
Abitibi (-73%) 20 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Source: Bloomberg, CIBC World Markets. Performance results shown should not and cannot be viewed as an indicator of future performance.
• Big moves up by Holmen and Oji since beginning of 2005 – outperformed the S&P. • Abitibi and Bowater down the most – largely due to rising Canadian dollar.
4 1. Financial Performance
Regional Profit Margins For Norske Skog 2000-2005 Average
50%
40% South America
30% Australasia Asia Europe 20% Canada 2000-2005 Avg. Margin (%) 10%
0%
Source: Company reports,, CIBC World Markets.
• Range from 10% to 30%, with Europe and Asia in the middle.
• Brazilian operations now up to 20% more expensive than in parts of Europe, and 50% more than in Chile – skyrocketing electricity, strong currency and high taxes.
• Canada was the worst, and partly due to strong C$ - sold in Q1/06. 5 1. Financial Performance
Norske Skog’s Regional “Newsprint” Profit Margins 2000-2005
45% 2000: Spread 22.3% 40% 2005: Spread 9.2% 35% 30% South America 25% Australasia 20% Asia 15% Eur ope 10% Canada 2000-2005 Margin (%) 5% 0% 2000 2001 2002 2003 2004 2005
Source: Company reports,, CIBC World Markets.
• The trend has been down in all of the regions, except North America – the latter reflects management improvements at Catalyst and falling fiber costs.
• The spread between the highest and lowest margins has narrowed from 22% to 9% - reversion to the mean.
6 1. Financial Performance
“Newsprint” Profit Margins By Company 2000-2005 Average 35% o A
30% n Norske Skog
25% Holme Stora Ens UPM Kymmene
20% Abitibi Bowater 15% Catalyst Paper/NSG N Nippon Paper Group 10% 2000-2005 Avg. Margin (%) 5%
0%
Source: Company reports,, CIBC World Markets.
• Range from 10% to 25% - Catalyst at the bottom, Norske Skog/Holmen at the top.
• European’s stronger – due to better equipment and weaker currency over this period?
7 1. Financial Performance “Newsprint” Profit Margins By Company 2000-2005 40% 2000: Spread 18.1% 35% 2005: Spread 9.3% 30% UPM 25% Nors ke 20% Bow ater Stora 15% Holmen 10% Abitibi Nippon 2000-2005 Margin (%) 5% CTL 0% 2000 2001 2002 2003 2004 2005
Source: Company reports,, CIBC World Markets.
• Downward trend for most, but partial recovery for most since 2003 (but not Norske).
• Spread between “best” and “worst” cut in half – from 18% to 9%. European advantage narrowing.
• Margins in Japan are very stable, and also among the lowest.
8 1. Financial Performance
Return On Capital Employed Five-year Average (2000-2004) 12 Cos t of Capital 10% 10 8.5 )
8 7.3
6 5.2 4.7 4.6
ROC E (% 4 1.9 2 1.6 0.9 0 Paper Nippon Unipac Holmen UPM - Catalyst Bowater Abitibi Kymmene Stora Enso Norske Skog Consolidated Source: PricewaterhouseCoopers, CIBC World Markets. • The “purest” newsprint companies are Norske Skog, Abitibi, Bowater and Holmen.
• Holmen and Norske Skog have generated roughly the same margins, but Holmen’s ROCE is almost double….too much capital employed with Norske?
• Regardless of which paper grade they are focused on, none of the major paper companies have been able to earn their cost of capital over time.
• Why? No barriers to entry, but meaningful barriers to exit? 9 2. Regional Demand World Demand TOTAL ASIA 33%
OCEANIA 2%
AFRICA 2% TOTA L EA STERN EUROPE LAT.AMER.&CAR 5% 5%
NORTH A MERICA WESTERN 28% EUROPE 25%
Source: PPPC, CIBC World Markets.
• Global demand totaled 36.598 million tpy in 2005.
• Asia is now the single biggest continental market, followed by Europe and North America.
10 2. Regional Demand
Growth In Global Newsprint Demand: 2000 Vs. 2005 14,000 -21%
12,000 ~0%
10,000
8,000 +7% 6,000 -1% (000s tons) 4,000 +75% +1% 2,000 Asia China Japan World North Rest of Rest of Europe America 2000 2005 Source: PPPC.
• Global demand has been essentially flat since 2000 (North America down, and Asia up). • Rise in China has been dramatic – up 75% in five years. • India has accounted for most of the rise in “Rest of Asia” – up 44%. • Europe in aggregate has been flat, with West down and East up – both around 300,000 tonnes.
11 2. Regional Demand
Changes In Demand: China Vs. United States (1990-2005)
3 China
2
1
0
-1
-2
Change in Demand (mln tpy) -3 USA -4
Source: PPPC, CIBC World Markets.
• Over the longer term, the declining demand in the U.S. has been largely offset by increasing demand within China (-2.9 million versus + 2.4 million).
• Chinese demand driven by dramatic growth in advertising and new publications, improved access to better quality paper.
12 2. Regional Demand
Secular Annual Growth In Demand Going Forward
• Global: 1.0% • North America: -0.5% • Rest Of World: 2.0% • Emerging Markets: 3.5% • China And India: 5%-6%
• Key drivers outside North America are increasing: • Population • Literacy • Urbanization • Democratization
13 2. Regional Demand Newsprint Consumption Per Capita (2004) 50 45.8
45 43.4
40 38.0 35.1 35.1 34.8 34.0 35 33.2 30 29.9 26.6 26.0 25 20
15 14.6 (kg Per Capita) 10
5 3.7 1.8 1.2 1.1 0 UK USA India China Japan Taiwan Norway Canada Sweden S. Korea Thailand Australia Germany Indonesia Singapore Hong Kong Source: PPPC.
• If Hong Kong is any indication, the potential for the rest of China (and India) is exciting – 45.8 versus 1.8. Kg/capita.
• China’s per capita consumption has risen by more than 350% since 1990.
14 2. Regional Demand Consumption Per Unit Of Real GDP 120
110 100 90
80 70 .
60 50 40 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Global North America ROW Source: RISI.
• The “intensity of consumption” has been declining for newsprint in both North America and the rest of the world.
• Newsprint is not alone - the same is occurring for UFS paper — the dominant grade of printing & writing paper — since the early 1990s.
• The North American experience with newsprint is worth studying…it may be the future for the rest of the global industry.
15 2. Regional Demand
SAAR Total U.S. Newsprint Consumption Help-Wanted Index 13.0 110
12.5 100
12.0 90
11.5 80
11.0 70
10.5 60 50 10.0 40 9.5 30 9.0 Jul-85 Jul-88 Jul-91 Jul-94 Jul-97 Jul-00 Jul-03 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05
Source: PPPC. Source: The Conference Board.
• The consumption of newsprint in North America is on a secular decline - down for the 33rd straight month in February 2006.
• From 2000 to 2003, the Help-Wanted Index fell 60%, and U.S. newsprint consumption fell 20%...Index has bottomed, but consumption still falling.
• We expect 3% annual drop in 2006/7.
16 2. Regional Demand
U.S. newsprint consumption declined 5.5% in 2005.
Why?
• 1%-2% due to declines in grammage – (toward 48.8)
• 0.5%-1.0% due to other conservation measures (tabloid format, fewer financial quotes)
• 2%-3% due to reduction in circulation
• 1% due to lower advertising linage (competition from other media)
First two causes have likely run their course. Last two causes likely remain an ongoing threat.
17 3. Regional Industries
World Capacity OCEANIA TOTAL ASIA 2% 28% TOTA L EA STERN EUROPE 7%
A FRICA 1% LAT.AMER.&CAR 2%
NORTH A MERICA 35% WESTERN EUROPE 25%
Source: PPPC, CIBC World Markets.
• Global capacity is 39.645 million tonnes in 2006
• North America remains the largest producing region (for now).
18 3. Regional Industries Capacity Changes In The Major Regions (2000-2008) 30% 25% 20% 15% 10% 5% (% change) 0% -5% -10% 2001 2002 2003 2004 2005 2006 2007 2008 North America Europe China Source: PPPC, CIBC World Markets. • Global newsprint capacity remained essentially flat from 2000 to 2005. The PPPC expects its to rise by 0.6% in 2006, 1.4% in 2007 and 1.3% in 2008. • The global numbers mask major changes at the regional level. • Significant declines in North America • Modest increases in Europe (mostly in the East) • Dramatic increases in China – roughly 15% annual growth in 2000-2005. Up 23% in 2006 and 17% in 2007. • Rest of Asia essentially flat (although RAMA is building in India in 2008). 19 • Brazil now unattractive due to energy, and tax regime. 3. Regional Industries Technical Age Vs. Capacity (2003) PM capacity, 1000 mt/a 300 STRONG EE
SCAN WE USA 200
Weighted average capacity 191,000 mt/a
Asia-Pacific CAN 100 LA
Weighted average 0 WEAK technical age 14.3 years 30 25 20 15 10 5 0 Technical age, years Source:Jaakko Poyry Consulting. • Mills in Western Europe are on average the most “technically competitive”, while those in Canada are the least. • Canada’s average has improved since 2003 – 8 machines closed or converted. • Weighted average capacity in 2003 of roughly 190,000 tpy. (versus new 20 world class machine of 400,000 tpy) 3. Regional Industries 15 Largest Newsprint Machines
700 i a 600 h a i n u h 500 Shandong Huata 400 Stora Enso, Langerbrugge Norske, Golbey Hebei PanAsi Stora, Sachsen SP Newsprint, Georgia UPM, Steyermu Holmen, Fuenlabrad Aylesford, UK UPM, Schwedt UPM, Schonga Myllykoski/Hurt Holmen, Bravike Shandong Huata
300 PanAsia, Jeonju (000s MT)
200
100
0 Europe Asia North America
Source: Canadian Paper Analyst, CIBC World Markets.
• Size does matter when it comes to efficiency of newsprint machines
• Europe has most of the biggest machines (10) – versus only one in North America
• Two more 400,000 tpy machines will be started in Shandong province in late 2006/early 2007. China will have five of the top 15 by mid-2007. 21 4. Benefit From Trade Global Trade Flows Map 625
105
280 110 630 535 15 765
745
Asia Australasia
Source: PPPC, Abitibi, CIBC World Markets.
• North America ships significant volumes to all the major continental markets (except China)
• North America’s absolute exports to Asia fell sharply in 1996-8 in response to the Asian financial crisis, increases in Asian newsprint capacity and Chinese anti-dumping duties on newsprint.
• Asia’s imports are now sourced relatively evenly among North America, Western Europe and Russia.
• Inter-regional trade fell roughly 15% last year: • Western Europe to Asia down 40% • Russia to Asia down 30% 22 • North America to Japan down 30% 4. Benefits From Trade
Top 10 Exporters Top 10 Importers 2005 2005
8000 6,000
7000 Canada 5,000 USA 6000 4,000 5000
4000 3,000
3000 (000s tonnes) (000s tonnes) 2,000 2000 Western Europe Russia States Western Europe
1,000 India 1000 Korea South USA Turkey Taiwan Hong Kong Japan Brazil Australia Indonesia Other CIS & baltic New Zealand Philippines Japan Chile 0
Source: PPPC, CIBC World Markets. Source: PPPC, CIBC World Markets.
• Canada remains the dominant exporter, but over 70% is to the U.S. • Russia is getting bigger, but less is going to Asia • India is now the second biggest importing country (not in Top 10 in 2003)
• Chinese market is “an island”. Tariffs sliding down from 7.5% in 2005 to 5% in 2006
23 4. Benefits From Trade
Chinese Anti-Dumping Duties
Canada 57%-78% United States 78% South Korea 9%-55%
• In 1999, China imposed stiff anti-dumping duties on key exporters – they were maintained after a sunset review in 2004.
• “Infant Industry” strategy? Korea is the only major Asian exporter.
• Protection will become “academic” with the installation of new Chinese capacity.
• Will China become a net exporter of newsprint? Depends critically on level of domestic demand.
24 4. Benefits From Trade CLSA China Purchasing Managers’ Index
50.0 = no change on previous month 60.0 Improving business conditions
55.0
50.0
Deteriorating business conditions 45.0 Jul-05 Jan-05 Jun-05 Oct-05 Jan-06 Feb-05 Mar-05 Apr-05 Feb-06 Mar-06 Sep-05 Nov-05 Dec-05 May-05 Aug-05 Source: CLSA, CIBC World Markets.
• The above is the one of the few macro-indicators from an independent source. • Despite marginal improvements in recent months, the PMI only at 51.0 in March (<50.0 signals a contraction in manufacturing). • Growth in output and new orders remains subdued. Industrial profits are being squeezed, and evidence that growth is slowing: • Soft imports • Contracting industrial lending 25 • Fewer mainland tourists visiting Hong Kong 4. Benefits From Trade
Will China become a net exporter of newsprint?
• After growing 9.9% in 2005, consensus estimates for Chinese GDP growth at 9.0% for 2006 and 8.5% for 2007...still quite strong demand.
• But some pundits are less optimistic. CLSA is forecasting Chinese growth of 5%-7% for 2006 and 3%-5% in 2007.
• Given the rapid expansion in Chinese capacity (23% in 2006, 17% in 2007), newsprint prices in China are expected to drop sharply if domestic demand falters.
• In such a scenario, China would likely become a net exporter to Asia (and possibly the West Coast of the U.S. ). Would severely hurt the older mills in Asia and cause a negative “ripple effect” through the global newsprint market.
• Does it make sense for China to export energy in the form of newsprint? Interesting policy question for the National Development and Reform Commission. 26 5. Relative Costs Typical Cost Structure For Newsprint, 2005 Transport 15% Fiber 25%
Other 13%
Chemicals 7% Energy 20% Labor 20%
Source: CIBC World Markets. • Fiber: U.S., Western Canada and Southern Hemisphere have an advantage in virgin fiber (and relative prices of virgin/recovered fiber will likely decline).
• Energy: Russia, parts of Canada and recovered-based producers have an advantage.
• Labor: Asia and Southern Hemisphere have an advantage.
• Transportation: North America has an advantage (back-haul rates)
27 5. Relative Costs Old Newspaper Prices 300
250
e 200
150
US$/sh. Tonn US$/sh. 100
50
0 93 94 95 96 97 98 99 00 01 02 03 04 05
Nominal Real Linear (Nominal) Linear (Real)
Source: Pulp & Paper Week, CIBC World Markets.
• The impact of increasing Asian demand on recovered paper prices has been masked since 2000 by lower demand in North America and Japan.
• Recovery rate of ONP in U.S. roughly 75%… would need to grow to 87% to satisfy new Asian demand – almost impossible.
• Europe increasingly needs its own ONP, and Japanese economic recovery may curb exports. Increased recovery of ONP in Asia will be required (but enough??)
• Expect a secular (and cyclical) increase in ONP prices. 28 5. Relative Costs
Global Average Conifer Chips (Softwood) 150
140
130
120
110
100
90
80
70
60 88 90 92 94 96 98 00 02 04
Nominal Real Linear (Nominal) Linear (Real) Source: Wood Resources, CIBC World Markets.
• Real wood prices are on a secular decline. This suggests that virgin wood fiber has become less economically scarce over time.
• Will the downward trend continue? We think so. Asia is short of wood fiber, but the world is not.
• Virgin-based mills will benefit relative to recycled based mills. 29 5. Relative Costs
Average Delivered Softwood Pulp-fiber Prices For Q4/05 (US$/ODMT) 160 140 120 100 80 60 40 20 0 Chile China (dom) East Japan Brazil Spain New West US Canada Finland France Canada Zealand Norway Sweden US South Australia Germany Northwest
Chips Roundw ood
Source: Wood Resources International, CIBC World Markets.
• Canada is at both ends of the curve when it comes to fiber costs for the pulp & paper producers — highest in Eastern Canada and lowest in Western Canada
• Prices in Europe have been rising and are now much higher than in the U.S.
• Virgin fiber prices in China and Japan are consistently among the highest due to their deficit in wood fiber. A price premium is expected to continue, but it will likely decline over time due to inter-regional trade. 30 5. Relative Costs International Electricity Prices For Industrial Users (2004) Russia 2.9
Quebec/BC 3.3
Norway 4.3
Brazil, 4.7
S. Korea 5.3
U.S. 5.3
U.K. 6.7
China 6.8
Finland 7.2
Japan 12.7
0 2 4 6 8 10 12 14 (U.S. cents/kWh) Source: International Energy Agency, U.S. Dept. of Energy, Hydro Quebec. • Newsprint is one of the most energy-intensive paper grades due to mechanical pulping process. • Difficult to find comparable and current data. . • Russian mills have the biggest electricity advantage….Japanese mills the biggest handicap. • China is a “moving target” – appears to be site-specific, with access an issue for some. • Regional prices dependent on coal and gas are much more volatile than those dependent on hydro and nuclear – latter have high fixed costs, but low variable costs. For example: Electricity prices in Brazil up from 2.5 cents in 2002 to 6.0 cents in Q1/06 …new investment in newsprint industry no longer attractive. 31 5. Relative Costs Comparative Index Of Electricity Prices In North America For Large Power Customers (2005) Winnipeg, MB 82 Vancouver, BC 99 Montreal, QC 100 Portland, OR 111 Regina, SK 127 Montreal = 100 (April 2005) Moncton, NB 130 Halif ax , NS 142 St. John's, NL 143 Edmonton, AB 147 Detroit, MI 147 Charlottetow n, PE 156 Seattle, WA 160 Nashville, TN 160 Houston, TX 163 Miami, FL 166 Chicago, IL 168 Ottaw a, ON 210 Toronto, ON 216 San Francisco, CA 241 Boston, MA 322 New Y ork, NY 340
0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 Source: Hydro Quebec, CIBC World Markets. • Within North America, British Columbia and Quebec have the advantage – Northeast U.S. worst • In Ontario, 60% increase since 2001, with 15% in 2005. • Further increases coming in Canada in 2006 • 8%-15% in Maritime provinces. Catalyst for potential closures by Bowater and Stora? • 5% in Quebec 32 5. Relative Costs
Exchange Rates To The U.S. Dollar
+14.6% 110
-1.3%
-2.9% 90 -11.7% January 2000 = 100
-24.9% 70 Jan-03 Jan-04 Jan-05 Jan-06
Cdn Dollar Euro Japanese Yen Chinese Yuan Russian Ruble
Source: Bloomberg, CIBC World Markets.
• Due to its “twin” current account and budgetary deficits, the US$ is expected to depreciate over time. This will help the U.S. industry’s competitiveness. • Since 2003, the Canadian industry has been hurt the worst by an appreciating currency. • A weak currency benefited Russia in 2003, and Europe and Japan in 2005. • What will happen in the future? Important, but difficult to predict.
33 5. Relative Costs Percent Change From The Current To The PPP Implied Exchange Rate (2006) 30%
Overvalued
10% Canada W. Europe Japan
-10%
-30% Undervalued -50% Brazil
-70% Russia
-90% China India Source: International Monetary Fund. • The Purchasing Power Parity concept is one approach to estimating the long-run exchange rate. • Over the intermediate term, the Chinese and Indian currencies are likely to appreciate the most. The Russian and Brazilian currencies also have upward pressure…ability to export newsprint may be undermined. • The Canadian, European and Japanese currencies may be slightly overvalued.
34 5. Relative Costs North American Newsprint Comparison Cost Curve 2005 Vs. 2003, Sorted By Cash Cost 600
500
400
300
Cash Cost US$/FMT 200
100
0
02468101214 Cumulative Capacity (Millions of FMT Per Year)
Canada West Canada East US Northeast US South US West 2005 2003 Source: Paperloop Benchmarking Service. • Due largely to the strong C$, the Canadian mills dominate the top end of the cost curve.
• 15% appreciation of the C$ made the cost curve steeper – up another 5% since then.
• More eastern Canadian mills are threatened, representing 4%-5% of 35 North American capacity. 6. Broader Industry
Shipments As A Percentage Of Capacity:1980-2005 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
World North America Source: PPPC.
• Publishers are focused on the price of newsprint, and the price is driven by the industry operating rate. • Operating rates approached a cyclical peak in 2004 – global rates always lower due to uneconomic capacity in developing countries. • For 2006, we expect the global rate to decline to 91%, but the North American rate to increase to 98% - the practical maximum. 36 6. Broader Industry Newsprint Prices (30-lb. Eastern U.S.) 1000
900
e 800
700
600
US$/Metric Tonn 500
400
300 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Nominal Real Linear (Nominal) Linear (Real) Source: Pulp & Paper Week, CIBC World Markets.
• Prices are near cyclical peaks. Highest in U.S. since 1996, Europe since 1998, and Hong Kong since 2000.
• Publishers are not big winners now, but they do benefit from the downward secular trend in real newsprint prices.
• Producers not winners due to higher costs…U.S. prices driven higher by the “cost-push” affect of higher input prices and the strong C$. 37 6. Broader Industry
Winners:
• Consumers (in the longer term)
• Owners of recovered paper
• Owners of virgin fiber in Asia
• Chinese producers (with modern mills)?
• U.S. producers (with modern mills)
• B.C. producers (if not for the strong C$)
38 6. Broader Industry
Losers:
• Recovered-paper consumers
• Old newsprint industry (especially in Asia)
• Eastern Canadian producers
• Western European producers
• Labor – everywhere in the global industry (except in the new mills being constructed).
• Shareholders (everywhere?) – ROCE < cost of capital
39 Strategic Case Study: PanAsia
• PanAsia - the largest newsprint producer in Asia (excluding Japan).
• In September 2005, Abitibi sold its 50% stake in PanAsia to its partner, Norske Skog.
• Norske expanded its position in the fastest growing market in the world; and Abitibi retreated to the slowest growing market.
• Norske paid US$600 million (plus a cash purchase price of up to US$30 million depending on 2006 results).
• Based on an enterprise value/2005 EBITDA multiple: • Norske Skog paid 14.5x*, and at the time, • Norske Skog was trading at 7.9x, while • Abitibi was trading at 11.4x.
Who got the best deal? What is an acceptable price for “growth”?
40 * PanAsia 2005 EBITDA is estimated. Important Disclosures
Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.
Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.
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41 Companies Mentioned
Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets:
Stock Prices as of 04/11/2006: Abitibi-Consolidated Inc. (2a, 2d, 2e, 2f, 2g, 6a) (A-TSX, C$4.84, Sector Outperformer) Bowater Inc. (2g, 9) (BOW-NYSE, US$28.13, Sector Performer) Catalyst Paper Corporation (2a, 2e) (CTL-TSX, C$3.29, Sector Underperformer)
Companies Mentioned in this Report that Are Not Covered by CIBC World Markets:
Stock Prices as of 04/11/2006: Anglo American (AAUK-NASDAQ, US$21.23, Not Rated) Holmen AB (HOLMBQ-L, p1869.00, Not Rated) Huatai Paper (600308-CH, £10.30, Not Rated) Nippon Paper Group (3893-T, ¥428000.00, Not Rated) Norske Skogindustrier ASA (NSG-OL, [NOK]109.25, Not Rated) Oji (3861-T, ¥713.00, Not Rated) Stora Enso Oyj (SEO-NYSE, US$14.70, Not Rated) UPM-Kymmene Corp. (UPM-NYSE, US$23.15, Not Rated)
Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.
42 Key To Important Disclosure Footnotes
Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months. 4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. 6a The CIBC World Markets Inc. analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 8 A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares.
43 CIBC World Markets Price Chart
For price and performance information charts required under NYSE and NASD rules, please visit CIBC on the web at http://www.cibcwm.com/research/sec2711 or write to CIBC World Markets Corp., 300 Madison Avenue, 7th Floor, New York, NY 10017-6204, Attn: Research Disclosure Chart Request.
CIBC World Markets' Stock Rating System
Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months. SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months. SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months. NR Not Rated CIBC does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. "CC" indicates Commencement of Coverage. The analyst named started covering the security on the date specified.
44 Ratings Distribution
Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 11 Apr 2006) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) 305 36.7% Sector Outperformer (Buy) 160 52.5% Sector Performer (Hold/Neutral) 401 48.3% Sector Performer (Hold/Neutral) 187 46.6% Sector Underperformer (Sell) 98 11.8% Sector Underperformer (Sell) 49 50.0% Restricted 16 1.9% Restricted 16 100.0% Ratings Distribution: Paper & Forest Products Coverage Universe (as of 11 Apr 2006) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) 4 28.6% Sector Outperformer (Buy) 3 75.0% Sector Performer (Hold/Neutral) 7 50.0% Sector Performer (Hold/Neutral) 5 71.4% Sector Underperformer (Sell) 3 21.4% Sector Underperformer (Sell) 2 66.7% Restricted 0 0.0% Restricted 0 0.0% Paper & Forest Products Sector includes the following tickers: A, BOW, CAS, CFP, CTL, DTC, FPS, IFP.SV.A, IP, LPX, NBD, TBC, WFT, WY.
*Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting.
Important disclosures required by IDA Policy 11, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at http://research.cibcwm.com/res/Policies/Policies.html or by writing to CIBC World Markets Inc., BCE Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request.
45 Not for Distribution: This marketing presentation is issued and approved by CIBC World Markets Inc. solely for distribution to institutional investor clients and not with a view toward public distribution as a research report. This presentation is provided to such institutional investor clients for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation is prohibited.
This presentation is issued and approved for distribution by (i) in Canada, CIBC World Markets Inc., a member of the IDA and CIPF, (ii) in the UK, CIBC World Markets plc, which is regulated by the FSA, and (iii) in Australia, CIBC World Markets Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, "CIBC World Markets"). This presentation has not been reviewed or approved by CIBC World Markets Corp., a member of the New York Stock Exchange (“NYSE”), NASD and SIPC. This presentation is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC Rule 15a-6 and Section 15 of the Securities Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major institutional investors receiving this presentation should effect transactions in securities discussed through CIBC World Markets Corp. This document and any of the products and information contained herein are not intended for the use of private investors in the UK. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of clients of CIBC World Markets Australia Limited. The securities mentioned in this presentation may not be suitable for all types of investors. This presentation does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC World Markets. Recipients should consider this presentation as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security recommended in this presentation, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendations herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Non-client recipients of this presentation who are not institutional investor clients of CIBC World Markets should consult with an independent financial advisor prior to making any investment decision based on this presentation or for any necessary explanation of its contents. CIBC World Markets will not treat non-client recipients as its clients by virtue of their receiving this presentation. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this presentation. The price of the securities mentioned in this presentation and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal. CIBC World Markets accepts no liability for any loss arising from the use of information contained in this presentation, except to the extent that liability may arise under specific statutes or regulations applicable to CIBC World Markets. Information, opinions and statistical data contained in this presentation were obtained or derived from sources believed to be reliable, but CIBC World Markets does not represent that any such information, opinion or statistical data is accurate or complete (with the exception of information contained in the Important Disclosures section of this presentation provided by CIBC World Markets or individual research analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this presentation and are subject to change without notice. Nothing in this presentation constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this presentation to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser. This presentation may provide addresses of, or contain hyperlinks to, Internet web sites. CIBC World Markets has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient’s convenience and information and the content of linked third-party web sites is not in any way incorporated into this document. Recipients that choose to access such third-party web sites or follow such hyperlinks do so at their own risk. Although each company issuing this presentation is a wholly owned subsidiary of Canadian Imperial Bank of Commerce ("CIBC"), each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation ("FDIC"), the Canada Deposit Insurance Corporation or other similar deposit insurance, (ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject to investment risks, including possible loss of the principal invested. The CIBC trademark is used under license. © 2006 CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets is prohibited by law and may result in prosecution. 46