The China Perspective recently had the opportunity to interview Orient Paper's CFO, Winston Yen, about Orient Paper's business, challenges and opportunities in China's burgeoning paper industry.

1. ORIENT PAPER INC has two main paper product groups, can you give a breakdown on the difference in margins for each product and growth rates you are seeing for each segment?

The Company currently has two product groups: white paper (coated offset paper for printing purposes) and brown paper (corrugating medium paper for packaging purposes). The specifics of these products are as follows:

White Paper Products: Generally white paper products has been generating 22%-24% (depending on market condition) of gross profit margin in recent years

1. High-Grade Offset Printing Paper: We made high-grade offset printing paper with pulp (domestic and imported) and recycled unprinted scrap paper and sell to printing shops for high-quality color printing.
2. Medium-Grade Offset Printing Paper: White, unprinted scrap paper and printed textbooks, recycled from printing shops and book binders, is the major source of raw materials for our medium-grade offset printing paper.

Brown Paper (Corrugating Medium): We use recycled paper board as major raw material for our corrugating medium paper. Average gross profit margin for corrugating medium paper ranges between 14% and 18%.

2. In terms of ORIENT PAPER INC’s customer base, can you give us an idea who your typical customers are and what sort of contracts you have with them?

Our customers include the following categories:

1. Printing Shop (including publishing companies that own their own printing shops)
2. Packaging material companies, which buy our corrugating medium for manufacturing of corrugated paper and paper boards.
3. Paper product distributors

Our sales representatives keep regular contact with the purchasing department of our customers to understand the customers’ demand in various types of paper. A typical customer purchase order covers deliverables over the period from the next 10 days to half month.

3. How much change in raw material costs have you seen from 08-09 and what do you see going forward? What long term supplier agreements if any do you have in place to protect your margins?

Of all four major raw materials, we have seen significant fluctuations in the price of recycled paper board. An analysis of our own purchase cost reveals that during the period from January 2008 to October 2009, recycled paper board price peaked at RMB 1,665/ton in the summer of 2008 and went through the bottom price of RMB 667/ton in January 2009. Generally speaking, for the other types of raw materials, we have come off from a plateau of high raw material prices in the 2008 pre-financial crisis era, with costs stabilized for most part of the year 2009. However, as the Chinese economy recovers, we believe raw material costs will steadily rise over the next few months.

We have long term supplies contracts with our major suppliers. However, these contracts set forth the suppliers’ contractual obligation to deliver whatever goods we order on a timely basis, but they do not fix the raw materials prices, which are left for the market to determine. Our purchasing department constantly evaluates the trend of commodity prices and makes projection of future purchase costs. If we determine that raw material prices are on the rise, we will seek to increase the stock of raw material inventory in our warehouse. On the other hand, if our analysis indicates that purchase price may drop in future periods, we may decide to minimize the level of raw material inventory on hand.

4. In terms of operating capacity, how close is ORIENT PAPER INC to operating capacity and what plans do you have going forward to expand production?

Our current capacity for fiscal year 2009 is 250,000 tons. It is estimated that actual production can reach 220,000 tons at the end of this year.. In addition to the digital photo paper plant, which will add up to 840 tons of production capacity to our annual output in year 2010.

5. Any Estimate on when the acquisition of the digital photo paper plant will happen and how soon that will be accretive to earnings?

While our team has been working on site to prepare for the launch of the digital paper operation, we have completed the acquisition by mid-December 2009. We plan to make the first shipment of digital photo paper in first quarter of 2010, possibly immediately after the Chinese New Year holidays in February.

6. Also in your latest round of funding the company has made commitments to generate 10 million USD and 18 million USD in net income this year and next, if not investors from the last round will be entitled to 3 million shares of common stock. How close is ORIENT PAPER INC to meeting these goals this year and how confident are you in meeting those goals next year?

We are glad to report that we have already satisfied the PIPE investors’ expectation of our 2009 earnings by the end of the third quarter. The $10 million make good target allows a 10% margin of error. With our net income topping $9 million dollars at the third quarter of 2009, we believe we are clear of the 2009 make good target.

Provided the digital photo paper project comes along as planned, as well as future growth brought by production expansion (whatever it turns out to be), we are fairly confident in achieving the 2010 make good target of $18 million (or at least the lower threshold of $16.2 million after the 10% margin of error).

7. How will the digital photo paper acquisition be funded and are you looking into any other acquisitions?

The digital photo paper plant acquisition is funded by (1) a cash down payment provided by the proceeds of the $5 million PIPE, and (2) internal cash reserves.

We are evaluating a couple of expansion/acquisition plans but have not made any decision yet. Management team may submit the final evaluation to our Board of Directors for its consideration in January 2010.