UPDATE 2-Finland's UPM invests in China to offset weak Europe

Tue Aug 7, 2012 8:11am EDT

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HELSINKI, Aug 7 (Reuters) - Finnish forestry group UPM-Kymmene is to invest 390 million euros ($484.11 million) to expand a paper mill in China to help increase the company's sales in a market offering stronger growth opportunities than sluggish Europe.

UPM posted a bigger-than-expected drop in second-quarter profit on Tuesday that underscored weakness in the European paper market that also hit second quarter earnings at rival Stora Enso last month.

UPM, which is struggling to cope with the emergence of cut-price rivals and consumers' shift to digital from print media, said the money would be used for a new paper machine at its Changshu mill in China.

The machine, which will make paper labels used on consumer goods like food packages, is scheduled to begin running by the end of 2014. The country's burgeoning middle class is seen providing long-term growth opportunities for UPM as Europe's economy falters.

"This move is aligned with our strategic target to have more than 50 percent of our sales from well performing growth businesses in the latter part of the decade," UPM's Chief Executive Jussi Pesonen said in a statement.

The Changshu mill made up about 7 percent of UPM's annual paper production capacity in 2011, according to the group's annual report.

UPM has had to cut costs and production capacity elsewhere to help it cope with weak demand and is also in the middle of restructuring Myllykoski, a debt-laden rival it bought last year. Analysts had expected this industry consolidation to help improve the company's profitability and stabilise market prices.

UPM said that while its profitability improved in the first half compared with the second half of last year, it would not improve further in the latter half of 2012.

"All in all, the guidance that they're giving, that the second half will be similar to the first half, that's a bit softer than we expected. The market expected more," said Markku Jarvinen, analyst at Evli Bank.

He said the company's investment in China was not a total surprise, and that investors would want to know whether there was more such spending to come.

UPM's April-June operating profit, excluding special items, fell to 118 million euros ($146 million) from 201 million a year earlier.

That was much lower than the market's average forecast of 150 million euros, according to a Reuters poll, and the company blamed losses from currency hedging as well as weakness in European demand.

UPM shares fell 1.9 percent to 8.67 euros by 1158 GMT. ($1 = 0.8056 euros) (Reporting by Helsinki newsroom; Editing by Mike Nesbit, Helen Massy-Beresford and Jane Merriman)

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