A genuine cost advantage does not come from buying one raw material cheaply or running one paper machine faster. It comes from organizing qualified fiber, energy and steam, equipment efficiency, logistics radius, product mix, and working capital simultaneously—making the full cost of every metric ton of qualified paper more controllable, margins more recoverable, and earnings more readily convertible into cash.

FOUR NUMBERS · Four Key Figures

Scope note: HK$1.941 billion is stated on the basis of profit attributable to ordinary shareholders; on the consolidated income statement’s “profit for the year” basis, the year-over-year increase was 43.0%. Gross margin and its change are calculated from annual-report data. First-half 2026 data are from a positive profit alert and are preliminary and unaudited; as of the verification date of August 9, 2026, no formal interim-results announcement had been found.

EVIDENCE LEVEL · Three Types of Evidence

Results Achieved: 2025 revenue, profit, segment performance, debt, and cash flow are drawn from the audited annual report.

Preliminary Operating Signal: The first-half 2026 profit range comes from a positive profit alert and cannot yet be broken down into volume, price, cost, and cash contributions.

Planning and Construction Indicators: The PM7 technical upgrade, the Guigang project, and future technology deployment are not counted as existing capacity or realized performance.

ONE SENTENCE · Lee & Man Paper in One Sentence

Lee & Man Paper’s real strength is not that “one cost item is lower,” but that it links fiber, pulp, energy, paper machines, production bases, products, and capital—turning low cost from a temporary outcome into an ability to adjust continuously. This does not mean it has the industry’s lowest absolute cost in every period or for every product grade.

CORE JUDGMENT

Bottom Line First: Lee & Man Paper’s Strength Lies in Its “System-Level Cost Capability”

Lee & Man Paper’s competitiveness can be divided into six interlocking control dimensions:

01 · FULL COST SYSTEM

Layer One: Cost Is Not the Purchase Price, but the Total Outcome of One Metric Ton of Qualified Paper

The most common mistake made by packaging-paper producers is to equate low cost with cheap recovered paper, lower coal prices, or large paper machines. True competitiveness is determined by the full cost of converting incoming raw materials—through sorting, pulping, stock preparation, papermaking, sizing, drying, rewinding, and transportation—into qualified products ready for delivery.

In 2025, the packaging-paper segment generated external revenue of HK$20.178 billion, up only 0.4% year over year, while segment profit increased from HK$766 million to HK$1.268 billion, a rise of approximately 65.5%. On this basis, segment profit as a percentage of external packaging-paper revenue increased from approximately 3.81% to 6.29%. “Segment profit” is not equivalent to gross profit or net profit, and publicly disclosed segment data are insufficient to attribute the improvement precisely among selling prices, raw materials, product mix, and manufacturing efficiency. At a minimum, however, the figures show that the profit recovery cannot be explained by revenue expansion alone and that marginal conditions in the packaging-paper business changed materially.

The company disclosed net profit per metric ton of HK$257 for 2025. The value of this figure lies not in an isolated high-or-low comparison, but in showing the sensitivity of profit to cost per metric ton, selling prices, and product mix: for a company producing several million metric tons, a sustained improvement of several tens of HK dollars per metric ton can translate into profit on the scale of hundreds of millions of HK dollars.

02 · PULP OPTIONALITY

Layer Two: The Value of Pulp-and-Paper Integration Is Not Maximizing Self-Sufficiency

A simple aggregation of the eight production bases listed in the 2025 annual report indicates annual capacity of approximately 7.58 million metric tons of paper and paper products, 950,000 metric tons of wood pulp, and 1.2 million metric tons of tissue paper. Designed capacity is not actual output, but this structure shows that Lee & Man Paper’s wood-pulp operations are not an isolated external-sales business; they are an important raw-material platform for packaging paper and tissue paper.

In 2025, external revenue from the wood-pulp segment declined 32.6% to HK$447 million, while intersegment sales still reached HK$1.913 billion. Looking only at external wood-pulp revenue therefore understates its contribution to internal supply stability, pulp furnish design, and industrial-chain profitability. A pulp mill’s strategic value often lies in internal substitution and risk buffering, not merely in external pulp sales.

But “having captive pulp” does not automatically mean “having the lowest pulp cost.” Captive pulp still bears delivered wood-chip costs, yield, chemicals, energy, depreciation, operating-rate, and logistics costs. Professional pulp-and-paper integration should enable dynamic choices among captive pulp, purchased market pulp, and recovered fiber based on price differentials, fiber strength, cleanliness, paper-machine compatibility, and customer quality requirements.

Lee & Man Paper’s annual report describes a strategy consistent with this balance: continuing to enhance vertical integration while optimizing pulp-line equipment and processes, and reducing exposure to raw-material price volatility through a combination of internal production and external procurement. Its moat is not closed-loop self-sufficiency, but a broader set of raw-material pathways and stronger switching capability.

03 · ENERGY INFRASTRUCTURE

Layer Three: Energy and Environmental Management Are Part of the Manufacturing System, Not Back-Office Costs

Paper machines require continuous, stable supplies of electricity and steam, while recovered-paper pulping generates plastic contaminants, pulp rejects, and sludge. For a large packaging-paper producer, energy prices, generating-unit efficiency, solid-waste disposal pathways, and environmental compliance are not four separate matters; together, they form an infrastructure network that affects both cost per metric ton and production continuity.

Lee & Man Paper’s 2025 annual report states that the Group’s comprehensive energy consumption was below 0.34 metric tons of standard coal equivalent per metric ton of paper and that more than 80% of production water was recycled. These figures follow the company’s ESG reporting scope, but they help explain why energy management is an important component of its cost system: sustained reductions in unit consumption directly affect a paper machine’s ability to withstand low-price competition.

The energy recovery of solid waste deserves particular attention. A 1,000-metric-ton-per-day solid-waste incineration line at Chongqing Lee & Man commenced operation in 2024. The annual report states that in 2025 it generated 116.418 million kWh of electricity and produced 1.039 million metric tons of high-pressure steam, while reducing raw-coal consumption by 44,900 metric tons and solid-waste discharge by 128,700 metric tons. These are disclosed annual operating results, not project-planning figures.

The comprehensive waste-to-energy projects at the Guangdong and Malaysia production bases disclosed investments of RMB 350 million and RMB 300 million, respectively, together with their designed benefits. They convert waste residue, waste plastics, pulp rejects, sludge, and biogas into steam and electricity, theoretically reducing both purchased-energy requirements and end-of-pipe disposal pressure. Project economics must still account for investment, depreciation, operations and maintenance, emissions control, and fluctuations in feedstock heating value.

04 · SUPPLY RADIUS

Layer Four: Eight Production Bases Are Not a Scale Collage, but a Supply-Radius Design

Packaging paper has relatively modest value per unit, is bulky, and is highly sensitive to transportation distance; logistics for both raw materials and finished products therefore materially affect delivered cost and customer responsiveness. Lee & Man Paper’s annual report lists eight production bases—Dongguan, Jiangsu, Guangdong, Chongqing, Jiangxi, Vietnam, Malaysia, and Chongzuo in Guangxi—forming an interconnected manufacturing network across South China, East China, Southwest China, Central China, and Southeast Asia.

The domestic production bases are close to packaging consumption, corrugated-box converting, and manufacturing customers in China; Chongqing, Jiangxi, and Guangxi also provide different support points for pulp, tissue paper, and regional markets. The Vietnam and Malaysia bases together list approximately 1.95 million metric tons of annual paper and paper-products capacity, enabling Lee & Man Paper to serve Southeast Asia from more than its Chinese factories and providing a second supply radius under different raw-material, trade, and market environments.

In 2025, approximately 84% of Lee & Man Paper’s revenue came from external customers in China, compared with approximately 89% in the prior year; the remainder came mainly from customers in Malaysia and Vietnam. The rising share of overseas revenue signals that regional production bases are beginning to translate into a market structure, but it also introduces management complexity involving cross-border procurement, foreign exchange, quality consistency, production-sales coordination, and local policy.

More production bases do not automatically make a company stronger. The key to network capability is whether every base can secure suitable raw materials, maintain stable operating rates, reach economically viable customers, and reduce duplicate inventories and cross-regional backhauls. A production-base network forms a genuine cost moat only when gains in market responsiveness and logistics exceed organizational complexity.

05 · PROFIT MIX

Layer Five: Packaging Paper Is the Foundation, While Tissue Paper Is Reshaping the Profit Mix

In 2025, packaging paper contributed 75.7% of Lee & Man Paper’s external revenue and remained its absolute core. Tissue-paper revenue was HK$6.017 billion, up 15.1% year over year, representing 22.6% of external revenue; external wood-pulp revenue accounted for approximately 1.7%. By revenue structure, Lee & Man Paper remains a company built on packaging grades such as linerboard and corrugating medium.

The profit structure, however, is no longer identical to the revenue structure. Tissue-paper segment profit reached HK$1.063 billion, up 12.9% year over year and representing approximately 43.7% of aggregate profit across the three segments, based on annual-report data; packaging paper accounted for approximately 52.2%. Tissue paper generated more than 40% of segment profit on less than one-quarter of revenue, showing that it is no longer a peripheral business but an important pillar of Lee & Man Paper’s profit portfolio.

Tissue paper has different demand patterns, brand channels, and price-formation mechanisms from industrial packaging paper and can reduce exposure to a single packaging-paper cycle. Packaging paper provides the foundation for scale manufacturing, customer networks, and cash turnover, while wood pulp supplies fiber internally. Together, the three form a portfolio combining “industrial-product scale + consumer-product value + upstream raw materials.”

A portfolio does not provide an automatic hedge. In 2025, tissue-paper segment profit grew more slowly than revenue. Based on annual-report data, segment profit as a percentage of external revenue edged down from approximately 18.01% to 17.66%. Consumer businesses must also bear the requirements of branding, channels, promotion, finished-goods inventory, and quality consistency, so long-term competitiveness cannot be explained by capacity expansion alone.

06 · CAPITAL DISCIPLINE

Layer Six: Technical Upgrades and Capital Discipline Must Generate Higher Returns from Every Metric Ton

Public filing and environmental-assessment information in 2026 indicates that Guangdong Lee & Man plans to invest RMB 720 million in an in-situ technical upgrade of its PM7 line, with a filing-period construction schedule from June 2026 to June 2027. According to an industry summary of publicly available environmental-impact-assessment application materials, capacity would remain at 300,000 metric tons per year before and after the upgrade, while the proposed basis-weight range would shift from 120–250 g/m² to 60–160 g/m². The project would also upgrade systems including machine width, operating speed, stock screening, the headbox, and film-transfer sizing. These items are project plans, not realized upgrade results.

The most important feature of this kind of project is that “capacity remains unchanged.” Rather than pursuing growth through additional nominal tonnage, it seeks to improve product fit and asset output per metric ton through lower basis weight, higher quality, greater efficiency, and lower energy consumption. If customers can reduce packaging-paper basis weight while meeting compression-strength, burst-strength, ring-crush, and converting requirements, value may shift from “price per metric ton” to “material cost and performance per box.”

The capital position also improved. In 2025, Lee & Man Paper’s total finance costs, including capitalized amounts, declined from HK$935 million to HK$736 million; bank borrowings fell from HK$21.982 billion to HK$21.006 billion; the net gearing ratio, as defined in the annual report, decreased from 0.73 to 0.63; and net cash generated from operating activities rose from HK$426 million to HK$3.520 billion.

Cash-flow improvement cannot be assessed from one headline figure alone. In 2025, operating cash flow before changes in working capital was HK$2.673 billion, up approximately 24.8% year over year. Final operating cash flow was also supported by a HK$952 million decrease in inventories, a HK$162 million decrease in receivables and prepayments, and a HK$674 million increase in accounts payable as presented in the cash-flow statement. Collections improved, with trade-receivable turnover days shortening from 47 to 41 days.

One distinction is particularly important: the “HK$952 million decrease in inventories” shown in the cash-flow statement cannot be interpreted directly as a decline in the period-end inventory balance; inventory on the balance sheet actually increased from HK$4.419 billion to HK$4.822 billion. Public financial statements do not fully disaggregate the bridging factors between the two measures. At the same time, raw-material and finished-goods inventory turnover days increased from 54 and 14 days to 60 and 18 days, respectively, while accounts-payable turnover days extended from 43 to 61 days. This indicates that part of the cash-flow improvement coincided with slower inventory turnover and longer supplier payment terms.

2026 CHANGE SIGNALS

Six Recent Developments Are Redefining Lee & Man Paper’s Cost Boundaries

CONCLUSION

Cost Optimization Is the Objective;
System-Level Control Is the Capability

Lee & Man Paper’s true strength does not lie in having a permanently fixed lowest cost, but in breaking cost into manageable variables: how fiber is selected, where pulp comes from, how energy is recovered, how far production bases reach, how products are combined, how paper machines are upgraded, and how capital turns over.

When these variables work together, a modest change in revenue can release much greater profit elasticity. When one link becomes unbalanced, the operating load of pulp mills, energy facilities, overseas production bases, tissue-paper channels, and inventory capital can simultaneously amplify complexity. This is the real boundary where “system advantage” and “heavy-asset risk” coexist.

Five questions will determine whether Lee & Man Paper can continue to strengthen:

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