HONG KONG: Many mainland-based small-scale manufacturers aren't expected to survive the ongoing harsh business conditions, analysts say.

Nine Dragons Paper (Holdings), China's largest maker of containerboard paper for packaging, dropped as much as 16 percent in yesterday's trading after it said there was a "substantial" profit reduction. The stock closed down 9.2 percent, at HK$1.68.

"While the leading industry players are struggling for survival, their small peers may vanish in the current market conditions," said Ben Kwong, head of research at KGI Asia.

Nine Dragons' closest competitor, Lee & Man Paper, is experiencing similar difficulties and might see its net profits for the second-half of the 2009 fiscal year fall 71 percent, year-on-year, to HK$211 million, according to reports from Citigroup.

Shares in Lee & Man shed 6 percent yesterday and ended at HK$3.45.

These export-oriented industries, however, could record big "turn-around" with big rebounds when the economy recovers and investment sentiment changes, Kwong said.

Owned by one of the richest women on the mainland, Zhang Yin, Nine Dragons has long been regarded as the barometer for the country's manufacturing industry, given that containerboard is widely used as packaging material for all kinds of products.

The Guangdong-based company said in a statement to the Hong Kong stock exchange Wednesday that it is expected to record a substantial reduction in its net profits arising from normal operations for the six months ended Dec 31.

The reduction was primarily attributable to the substantial decrease in the selling prices of the group's products, as well as the rising costs of raw materials, the company said.

Nine Dragons made the profit warning about two weeks after saying its financial position was sound, in order to dismiss market rumors that the company is involved in bankruptcy proceedings.

"The company's financial position is sound and stable, and its operation is normal," Chairman Zhang Yin said in a statement.

Manufacturing in China contracted by record margins in October as the global financial crisis cut demand for exports. The CLSA China Purchasing Managers' Index (PMI) - an indicator of the economic health of the country's manufacturing sector - fell to a seasonally adjusted 45.2 in October, from 47.7 in September, according to CLSA.

A PMI of more than 50 represents expansion of the manufacturing sector compared with the previous month. A reading of less than 50 represents a contraction, and a reading at 50 indicates no change.

(HK Edition 01/16/2009 page1)