Chairlady's Report

Dear Shareholders,

The Period has been extremely challenging for China's packaging paperboard industry and Nine Dragons Paper. Demand in the manufacturing industry has become more conservative under the influence of the Sino-US trade war. Tightening import quota and strengthened quality control by the government have caused significant volatility in the supply and prices of recovered paper. Nevertheless, during the Period the Group's sales volume and sales revenue hit another new record high, and upstream resources projects have been proactively developed and implemented to enhance the Group's future competitive advantages in terms of cost effectiveness and resources integration.

Amid the weakened sentiment of China's manufacturing industry, the Group successfully maintained sales growth and proactively reduced inventory by leveraging a diverse range of products, profound and trusted relationships established with its customers over the years, as well as quality and reliable pre- and after-sales services, at the same time utilizing the unique advantage of its extensive geographical coverage by cross-selling products among various bases. Coupled with the production commencement of PM2(VN) at the Vietnam base in the last financial year, and commencement of contribution from external sales volume of projects acquired in the US, the Group achieved a half-yearly total sales volume of approximately 7.5 million tonnes during the Period, reaching a historical high, and sales revenue reached approximately RMB30,328.0 million.

Against the backdrop of a changing and evolving macro environment as well as weakening demand, packaging paperboard product prices decreased during the Period. As it took time to gradually digest the inventory, the Group's profit performance was under pressure during the Period. Gross profit margin decreased from 24.5% in the first half of the last financial year (“Corresponding Period Last Year”) to 15.5%, while profit attributable to equity holders amounted to approximately RMB2,259.3 million, representing a significant decrease of 47.8% as compared to the Corresponding Period Last Year. Profit attributable to equity holders for the Period was approximately RMB2,457.7 million if the exchange losses on operating and financing activities (net of tax), amounted to approximately RMB198.4 million, were excluded, representing a decrease of 43.5% as compared to the Corresponding Period Last Year. Basic earnings per share of the Group for the Period was approximately RMB0.48. The Board has declared and approved the distribution of an interim dividend of RMB10.0 cents per share.

As of 31 December 2018, the Group's total design production capacity in Asia amounted to 14.08 million tpa. The new paper machine at the Chongqing base has commenced production in February 2019, bringing to the Group another 0.55 million tpa of design production capacity for packaging paperboard. In addition, the Group is actively pursuing the goal of completing the construction of another four new paper machines in 2019, among which a total of three new paper machines at the Shenyang base, Hebei base and Quanzhou base are expected to commence production in the second quarter in 2019, and a new paper machine at the Dongguan base is expected to commence production in the third quarter in 2019. Upon their production commencement, these four paper machines will add 2.05 million tpa to the Group's total design production capacity.

During the Period, ND Paper LLC, a wholly-owned subsidiary of the Group in the US, acquired two pulp mills, namely Fairmont Mill in West Virginia and Old Town Mill in Maine. The former has a design production capacity for recycled pulp of 0.22 million tpa and the products can be used by the Group's production bases in China. The latter was originally a bleached pulp mill with design production capacity of 0.16 million tpa. It will be reconfigured for production of unbleached kraft pulp after the acquisition. ND Paper LLC planned to implement a series of equipment upgrade and expansion plan for these two pulp mills, as well as the two paper and pulp mills acquired in the US in June 2018 (i.e. Rumford Mill in Maine and Biron Mill in Wisconsin), including construction of new recycled pulp and packaging paperboard production lines which is expected to increase the production capacity by 1.20 million tpa, and upgrade on existing equipment which is expected to increase the production capacity of pulp by 0.20 million tpa. All of the increased capacity will commence production before the end of 2021. By then, the Group's production capacity in the US will increase by 1.40 million tpa, and with the new capacity in China that will have commenced production in 2019, the global total production capacity will increase by 3.45 million tpa to exceed 19 million tpa. The production commencement of the plans mentioned above not only will bring more satisfactory returns for each of the projects in the US, but will also provide a more stable source of supply for the Group's raw materials with cost savings, thereby contributing to the Group's profitability, while providing the basic guarantee to satisfy the Group's raw material supply, laying a solid foundation for further integration of upstream resources in the future.

Although the construction of new equipment and development plans resulted in a period of high capital expenditure, and the Group's total debts and finance cost have increased during the Period as compared to the Corresponding Period Last Year, with the support of a strong operating cash flow, net debt and gearing ratio as at the end of the Period were lower than those at the end of last financial year. The net borrowing to total equity ratio decreased from 65.3% to 62.9%.

The Group strives to maintain a balance between the lower borrowing costs of debts denominated in foreign currencies and the impact of exchange rate fluctuations. It is expected that risks in this regard will be reduced with the increase in overseas assets and businesses. As at the end of the Period, the Group's debt portfolio comprised approximately 48% denominated in RMB and approximately 52% denominated in foreign currencies. By continuing to maintain certain debts denominated in Euro, the Group may reduce its finance costs.

In respect of future plans, in response to the government policy on building a cleaner environment, the Group is actively planning for “coal-to-gas” conversion for electricity generation and evaluating the overall impact of the new energy electricity generation model on its cost. It is believed that government implementation will be based on gas supply, pricing and market affordability. Currently, the Group is also actively exploring opportunities in other Asian countries to strengthen its channels for raw materials procurement and processing, and expand those markets with potential. The Group possesses the experience of successfully managing and operating its existing production base at Ho Chi Minh City, Vietnam, which will help to plan and smoothly implement the various overseas development mentioned above.

For future market outlook, it is expected that China will continue to impose stringent environmental policies, strengthening the advantages of the large enterprises. The Group is confident about the fundamental of domestic consumption and industry demand in China, and believes that there is still growth potential in market demand, while remaining cautiously optimistic and positive about the Sino-US trade negotiations. The Group will continue to put strenuous efforts to drive production and procurement diversification globally and expand the integration of value chain upstream and downstream, with a view to further enhancing its cost effectiveness and increasing the efficiency of daily operations, thereby maximizing the corporate values for its shareholders in this volatile and changing environment.

Lastly, on behalf of all members of the Board, I would like to express my sincere gratitude to the management and all staff members for their dedication to and trust in Nine Dragons Paper, as well as to governments at all levels, investors, banks and business partners who have been supporting the Group all along.

Cheung Yan

Hong Kong, 26 February 2019