* Q2 adjusted operating profit 118 mln euros vs market view
* Boosts investment in China
* Shares down 1.9 pct
(Recasts with China investment, updates share reaction)
HELSINKI, Aug 7 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
"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
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
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
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
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)