Orient Paper (NYSE AMEX:ONP)

Within the next 12 months we also intend to complete the acquisition of land that was originally approved by the government for approximately 667,000 square meters. If the entire 667,000 square meters is acquired at the unit price offered as of June 2010, the acquisition would cost approximately $14,500,000 in financial compensation to the current land owners and in land use rights from the government. However, similar to many other recent land acquisition transactions in China, the acquisition process has met significant opposition by some local residents. These opposing local residents hold various objections to the terms of the acquisition and amount of compensation that we offer. While the provincial and local governments are fully supportive for the proposed acquisition, it has been a recent trend in China that eminent domain not be exercised for fear of civil unrest. Under these circumstances, we are evaluating the options of (1) acquiring only a portion of the square footage as originally planned, (2) possibly raising the unit price of our compensation offer, or (3) withdrawing from the transaction and seeking other locations following a full refund of the security deposit put down on the 667,000 square meters land plot. As of September 30, 2011, we have pre-paid a security deposit of $7,200,438 to the local village council toward the purchase of the land and have taken possession of some 80,040 square meters of land. We expect to consummate a partial closing of an additional 30,015 square meters during the fourth quarter of year 2011 and to start the second phase of the acquisition, which involves the application and securing of the land use rights permit.

If we are able to obtain a significant portion of the 667,000 square meters, we expect to finance the acquisition with our working capital, net cash inflows generated from business operations during the remainder of the year 2011, and if necessary, loans from local Chinese banks. We do not have any firm commitment from the local banks with respect to new credit facilities in addition to the current bank borrowings, which aggregated to approximately $8,533,189 as of June 30, 2011. However, based on the present loan to equity ratio (which is less than 16% as of June 30, 2011), we do not believe the Company will have any problem securing additional bank loans as needed, unless the macroeconomic condition in China changes (e.g. government policies tighten bank credit facilities as a tool to control inflation).

The Company currently does not have any plans for equity financing in the next 12 months.  

The Company finances its daily operations mainly by cash flows generated from its business operations and loans from banking institutions and major shareholders. Major capital expenditures in year 2009 and 2010 are financed by cash flows generated from business operations and by proceeds of equity financing transactions. As of December 31, 2010 we had approximately $7,600,000 in capital expenditure commitments that were related to the construction of a new corrugating medium paper production line and will be satisfied by payment of cash within the next 12 months. We also intend to complete the acquisition of some 667,000 square meters of land within the next 12 months. The land acquisition is expected to consume an additional $14,500,000 in cash to pay for the financial compensation to current land owners and for the land use rights to the government. We expect to finance the above capital expenditures and land acquisition with the net working capital of $9,347,926, the net cash inflows generated from year 2011 business operations, which is estimated to be at least $19,000,000, and if necessary, new loans from local Chinese banks.

The Company made a land acquisition deposit payment in June 2010 in the amount of $11,494,601 to the local residents council, which is in charge of the reimbursement and relocation of the residents who occupied the parcel of subject land that is a vital part of any future expansion of our facilities. As of September 30, 2010, 56 families of local residents on the subject land have contracted to surrender their land use rights (representing roughly 85% of the total land to be acquired) and have been reimbursed. The land acquisition process will continue throughout the rest of the year for us to obtain the title through the local government. Unsatisfied with the slow progress of the acquisition, we demanded partial returns of the deposit from the local resident village council in December 2010 and received two refunds in total amount of $4,537,341. In addition to the remaining deposit, to complete the land acquisition we estimate that the entire land acquisition process will require an additional $14,500,000 (based on an estimated total average cost of approximately $31.78 per square meter) of cash payment in the next six to twelve months, which is expected to be paid for by future cash flows generated by our operating activities. If, however, the relocation and financial restoration phase progress continue to stall for more than six to twelve months, we may demand the full refund of whatever deposit already made from the local resident village council.

Orient Paper Inc. (OTCBB:OPAI)  shares have been quietly rising in recent weeks.  The company engages mainly in the production and distribution of products such as copy paper, uncoated and coated paper, digital photo paper, corrugated paper, plastic paper, kraft paper, graphic design paper, antifraud thermal security paper and other paper and packaging-related products.

Recent Company Data (5/21/09)

Price = $0.42
Shares Outstanding = 45.1 Million
Trailing EPS = $0.21
Fully-Taxed Trailing EPS = $0.19
P/E Based on Fully-Taxed Trailing EPS = 2.21

The most recent development was the filing of its SEC Form 10Q for the first quarter ended March 2009. It seems that the company's liquidity situation has improved. 

Excerpt from 2008 10K, page 27:

"We had net working capital deficit of $1,165,795 on December 31, 2008, a decrease of $6,690,831 over a net working capital deficit of $7,856,626 on December 31, 2007."

Excerpt from 2009 March 10Q, page 5:

"We had net working capital of $2,013,660 on March 31, 2009, an increase of $3,179,455 over a net working capital deficit of ($15,253,388) on March 31, 2008."

The stock has increased in price nicely from since the 10Q filing. The GeoTeam® is perplexed as to why the company has not issued a press release for the first quarter of 2009.  The company did issue a release for its 2008 year ended December which contained 2009 guidance details:

"We expect total sales for 2009 to increase approximately 30% compared to 2008. These projections do not take into account any impact related to future financing or acquisitions. We believe we can continue to grow and improve our company's operating results."

The GeoTeam® could not find similar verbiage in the 2009 10Q, so it is unclear as to whether this outlook is still intact.  It is the opinion of  the GeoTeam's® that the company needs to do a better job with its investor relations effort.  Furthermore, we were unable to locate a United States representative.  Nevertheless, due to the improving liquidity situation, the GeoTeam® will continue to monitor the Orient Paper story and has initiated a small position.  We are hoping that investors will  reassess the stock's risk premium by assigning it a higher P/E than it's current P/E of 2x trailing fully taxed EPS.  The trailing EPS for OPAI is $0.21 ( $0.19 fully taxed). For 2008, the company reported a 100% increase in EPS to $0.20 ($0.18 fully taxed).