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Rating Action:

MOODY'S UPGRADES OJI PAPER'S RATINGS TO A3 FROM Baa1; OUTLOOK STABLE

05 Nov 2004
MOODY'S UPGRADES OJI PAPER'S RATINGS TO A3 FROM Baa1; OUTLOOK STABLE

Tokyo, November 05, 2004 -- Moody's Investors Service has raised the senior unsecured long-term debt ratings of Oji Paper Co., Ltd. (Oji Paper) to A3 from Baa1. The ratings upgrade reflects Moody's expectation that Oji Paper will maintain its leading market position in the domestic industry and further improve its credit profile. The rating outlook is stable. This rating action concludes the review initiated on August 24, 2004.

Oji Paper's cash flow and balance sheet have been improving as a result of the company's business restructuring and cost-base rationalization since its merger with Honshu Paper in 1996, and through the economic downturn thereafter. The company improved its cost base thorough renovating production facilities, promoting efficient use of fuels, and reducing labor costs, an effort that continues to date. Oji Paper has restructured its business through consolidating functions relating to its containerboard business under Oji Paperboard Co., Ltd. The company also recently announced an initiative to streamline the crowded domestic paper distribution system through closing its direct distribution arms outside Tokyo. Moody's recognizes that Oji Paper is taking such a proactive role as the leading Japanese pulp and paper manufacturer. Ongoing rationalization and planned reduction of cost base will help Oji Paper counter rising material prices and maintain its profitability, in Moody's view.

Oji Paper's credit profile has also benefited from advanced consolidation in the Japanese pulp and paper industry. Overall production capacity has been decreasing over the past several years -- more evident with paperboard than with paper -- gradually narrowing the gap with mature domestic demand. Together with this, manufacturers succeeded in raising paper and paperboard prices between 2002 and 2003 -- though some of the raise in paper was curtailed by an increase in imported paper -- and are trying for another price raise this fall. Moody's believes this trend will help increase the company's ability to further stabilize and improve operating performance.

Oji Paper's profitability improved, with a consolidated operating margin of 6.2% in the year ended in March 2004 compared to 3.1% two years earlier. Its financial leverage also strengthened, with the total debt to capitalization ratio improving to 59% from 63% over the same period.

The company is seeking future growth opportunities in China and plans to build an integrated production facility in Jiangsu Province around 2008, with a sizable total capital expenditure of about 220 billion yen. However, the entire investment will be made in the period between fiscal 2007 and 2011, and is well within the company's expected operating cash flow. While the investment may prevent a rapid improvement in Oji Paper's financial leverage, Moody's expects that the company will be able to maintain its sound credit profile.

Moody's recognizes the Chinese market has an increasing influence on the Japanese pulp and paper industry. An increase in production capacity or change in China's supply / demand balance may create a temporary overflow to the Japanese market, and China's demand swings may affect the price of paper imported to Japan, which is currently on the rise. However, the rating agency also believes that Oji Paper will be able to suitably manage the resulting risks through its careful investment policy, disciplined financial strategy, and proper management of its new business in China.

Oji Paper Co., Ltd., headquartered in Tokyo, is one of the largest paper producers in Japan.

Tokyo
Motoki Yanase
Associate Analyst
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Takahiro Morita
Managing Director
Rating Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

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