Nine Dragons Paper (02689:HK)

The company has the highest paper production capacity in the world and is focusing on building an integrated layout of the industrial chain. The company was founded in 1995 and listed on the Stock Exchange in 2006. Currently, the company has ten major production bases in China, with significant transportation advantages, and is deploying production capacity overseas, such as the United States, Vietnam, and Malaysia, to obtain high-quality raw materials. By the end of FY2023, the company had a paper production capacity of 21.12 million tons and a fiber raw material production capacity of 4.72 million tons, making it the paper group with the highest production capacity in the world. Along with the continuous expansion of production capacity, the company's revenue grew steadily. Excluding FY2023, which was affected by the external environment, FY2022 achieved revenue of 64.538 billion yuan, an increase of 4.8% over the previous year, and the 10-year compound revenue CAGR of FY2012-2022 reached 9.0%.

Box board corrugated paper industry: weak balance between supply and demand, raw materials build competitive barriers. 1) Demand: Box board corrugated paper is mainly used for the outer packaging of consumer goods, partly exported indirectly in the form of product packaging, and is currently in a slow recovery stage; 2) Supply: the increase in imported paper supply is limited, and the marginal impact of tariff relief in 2024 is slowing down; leading domestic manufacturers actively lay out overseas bases and domestic wood pulp production capacity, focusing on the high-end box board paper sector with a better competitive pattern. Early high-speed capacity expansion is nearing its end. There are no new production capacity plans in 2024, and supply is expected to improve; 3) Inventory: 3) Inventory: Factory inventory is at the historical center, and the industrial chain is mainly in need of stock preparation; 4) Supply and demand outlook: The operating rate in 2024 is estimated to be 63.6%, up 0.7 pct from the previous year. The supply and demand pattern has improved slightly, but it is still at a historically low position; the current market sentiment is sufficiently pessimistic, and there is limited room for paper prices and raw material prices to decline. In the medium to long term, the concentration of large manufacturers continues to increase, and small manufacturers gradually withdraw from the market; high-end paper profits continue to lead, and low-end paper profits are expected to be realized after the industry pattern is optimized.

Company: Box board corrugated paper leader, profit is in a continuous improvement channel. The company is the leading company in the box board corrugated paper industry (sales volume market share was 23.4% in 2022). It has a perfect layout of domestic and overseas bases, built its own logistics and transportation infrastructure, and strengthened customer service capabilities. FY2023 lost more than 100 yuan per ton of paper, but FY2024H1 turned the loss into a paper ton profit of 29 yuan. The driving force behind the improvement was:

1) Raw material production capacity has been put into operation one after another to reshape the advantages of industrial chain integration. The waste ban has weakened the industrial chain integration advantage of the company's global waste paper recycling network. The company added 6.19 million tons of raw material production capacity (including 2.62 million tons of chemical pulp, 1.3 million tons of chemical pulp and 2.27 million tons of wood fiber), driving the company's high-end product structure and cost optimization. At the same time, rich wood pulp production capacity supports the company's expansion of new pulp and paper products. According to the company's production capacity plan, the company's production capacity of cultural paper and white card paper is expected to reach 227,2.4 million tons in 2025, accounting for 20% of the company's paper production capacity. Help the company improve its profit center and smooth out individual category cycle fluctuations.

2) Capital expenditure is slowing down, and production capacity continues to rise to ease depreciation and financial pressure. Since 2021, the company has entered a period of rapid expansion of production capacity, and the balance ratio rapidly increased from 48.6% at the end of FY2020 to 64.9% at the end of FY2024H1. As new production capacity is still climbing, the depreciation of FY2023's tonne paper has increased to 222 yuan/ton, which is 69 yuan/ton higher than the average value of FY2013-FY2020 before rapid expansion, but with the increase in capacity utilization, the depreciation of FY2024H1 tonnes of paper has been reduced to 160 yuan/ton. FY2023 is the highest point of capital expenditure, which will gradually slow down. It is expected that FY2025's balance ratio will improve and reduce financial pressure.

3) Coal prices have declined, and the energy cost advantage of self-owned power plants is expected to be reflected. Each of the company's production bases has its own thermoelectric boilers. In the early stages, the energy cost advantage was not reflected due to the high price of coal. The latest price of 5,500 kcal thermal coal is 835 yuan/ton, which continues to decline from the 2022/2023 average price of 1,270 yuan/965 yuan/ton. Self-generated power generation has a significant cost advantage over external power generation. Currently, restrictions on coal-fired power generation are getting stricter. Due to factors such as scale, efficiency, and environmental protection, it is difficult for small factories to obtain approval from power plants for new production capacity, and it is expected that the advantage of large manufacturers to bring their own electricity will continue to strengthen.