Now the U.S. government knows how Nine Dragons, China’s largest containerboard producer, feels.

On Aug. 5, ratings agency Standard & Poor’s (S&P) downgraded the U.S.’s credit rating from AAA to AA+. Less than two months ago, Nine Dragons, China’s largest containerboard producer, was stunned to learn that S&P had withdrawn its ratings. Its stock, listed in Hong Kong, plummeted, and Madam Yan Cheung, its founder (and currently the wealthiest woman in China, according to Fortune) was quick to issue a statement that S&P’s decision was unfounded.

In an exclusive interview conducted by email (and through a translator), Madam Cheung shed more light on the company’s reaction to S&P’s action, American Chung Nam (ACN, the Los Angeles-headquartered recovered paper-buying arm for Nine Dragons), and what the future holds for the company.

OBM: In light of S&P’s action last June, have any of ACN’s recovered paper suppliers expressed concerns about Nine Dragon’s credit rating or are they telling you this decision does not impact their dealings with you?

Madam Yan Cheung (MYC): Nine Dragons has always been a highly transparent company. We have adequate financing, with unused banking facilities exceeding RMB19.7 billion ($3.1 billion). Although our development plans have resulted in a debt level that looks on the high side, six lines have just started production for a total of more than 2 million metric tons in annual capacity. This includes 450,000 metric tons of our new product, recycled printing and writing paper, and more coated duplex board capacity. I believe our growth will bring more business opportunities to ACN’s recovered paper suppliers. Most of these suppliers recognize these growth opportunities with Nine Dragons and ACN. Our consistency and long-term relationships give our suppliers confidence that will not be easily affected by a single event such as S&P’s action.

OBM: Many industry observers have said that S&P made a big mistake by withdrawing its rating. Unfortunately, for a short time your company suffered from this, probably because a number of China-based companies (like Sino-Forest) have recently come under scrutiny. What did you learn from this unfortunate experience? Do you feel the need to be more financially transparent now? If so, what might you do differently?

MYC: Nine Dragons has always been a transparent company that remains focused on papermaking and related upstream and downstream businesses. We have no other business outside of the paper industry. Our financial condition has been amply disclosed in our financial reports, which were audited by one of the world’s four largest accounting firms. The assessment made by S&P on Nine Dragons is not based on our actual circumstances, and its criticism has not taken into consideration the overall governance level of the company. This is totally unfair to our investors. Ratings agency Fitch made a point about ownership concentration in Nine Dragons. We believe ownership should reflect the majority shareholder’s responsibility for a company with public shareholders. In addition, our independent directors have all demonstrated their responsibilities in monitoring the company’s performance. They have also built up a good understanding of our business over a long period.
Would you question mark a listed company that has its independent directors changing frequently?

OBM: Let’s move on. In recent months a number of U.S. virgin linerboard producers have been put up for sale. Does Nine Dragons have any interest in pursuing such U.S. operations or do you want to strictly continue to pursue your ambitious recycled containerboard growth plans in China?

MYC: Nine Dragons is an internationalized, publicly-listed company. We would first capture the development opportunities in China. At the same time, we also keep an eye on good companies in the international market. Of course, as a listed company, any acquisitions would be based on profitability and future development potential. In the foreseeable future, China will continue to experience healthy living standards improvements and consumption growth.

OBM: Speaking of these growth plans, it’s no secret that China’s economy is starting to slow a bit, going from a mid-teens to high single-digit annual percent growth rate. This is sure to negatively impact the need for corrugated boxes in China. Do you see this development as slowing down your growth plans? Have you had to postpone or delay these plans recently?

MYC: Nine Dragons’ growth plan is based on consumption and demand growth and is executed according to regional market environments. Our production bases are covering established regions, including the Pearl River Delta, Yangtze River Delta, and Fujian. They also cover regions with enormous future development potential such as Chongqing in the midwest, Shenyang in northeast, and Tianjin in northern China. This year marks Nine Dragons’ peak development period, but this year’s growth is mainly for new product grades such as coated linerboard, food and pharmaceutical grade white board, and recycled printing and writing papers. The capacity plan is executed based on projections that were formulated three years ago. From 2012 onwards, our growth will focus on production in those markets with high development potential, including Chongqing, Shenyang, and Tianjin. The capacity growth rate is expected to be lower than that this year.

OBM: Finally, you have come a long way since the early 1990s. In a New York Times article from Jan. 16, 2007, you indicated that in three to five years you want to be the world leader in containerboard, the “queen of containerboard.” That now translates into next year. Will your goal be reached? Whether it be in 2012 or 2013, you are certain to accomplish this objective. What will be your new goal? What will you want to accomplish next?

MYC: Our total annual capacity will exceed 10 million metric tons in 2011, and in 2012 it will be more than 13 million metric tons. I believe that five years from now, our total annual capacity will be no less than 15 million metric tons.

Our growth model is through building new production bases and increasing capacity according to market demand, not based on mergers and acquisitions. Of course, as a listed company, our target is to build ‘an enterprise that will thrive for generations and centuries.’ We will grow by not just capturing development opportunities in China, but also going international and exploring global markets that can demonstrate potential and deliver returns. OBM