”Chenming PaperThe cost dividend will be expanded, and gross margin is expected to increase.”

Author: Rexi

Editor: Tuya

Recently, paper stocks have continued to rise.Nine Dragons Paper (02689),Chenming Paper(000488.SZ/01812.HK),Sun Paper,Bohui PaperStock prices all hit record highs. Since February 1, Chenming Paper (A) has obtained a 7-day rise and fall of 4 boards, and the stock price has risen by more than 45%. By the close of February 22, the stock price was 12.10 yuan, with a market capitalization of 34 billion yuan, up 12.4 billion yuan from the end of January. The Hong Kong stock price of Chenming Paper rose more than 70% in February. As of the close of trading on February 22, the stock price was HK$8.44, with a market value of HK$25.2 billion.

Chenming Paper (000488.SZ) stock price chart (Source: Wind)

Chenming Paper (1812.HK) stock price chart (Source: Wind)

So, what is the reason behind the boom in the paper industry?

Cost and supply and demand jointly drive up prices in the paper market

From the supply side, the price of pulp and the improvement in supply and demand are jointly driving up the price of paper products. The main raw materials for papermaking are waste paper and pulp (wood pulp+non-wood pulp). According to public information, the market size of China's paper industry has reached trillion dollars, but in 2017, the self-sufficiency rate of waste paper in China's paper industry was 63.8%, and the self-sufficiency rate of pulp was only 43.9%.

In the short term, due to rising costs, the global pandemic, and falling inventories, etc., wood pulp supply is expected to reduce production by a total of 1.2 million tons in 2020 (including 0.65/0.55 million tons of broadleaf pulp/softwood pulp production), and pulp supply is relatively tight. In mid-January 2021, domestic pulp stocks in Qingdao, Changshu, and Baoding ports totaled 1.526 million tons, falling to the lowest level since January 2019.

Since May-June 2020, the price of double glue/copper plate/white cardboard has increased by 587/820/2773 yuan/ton respectively, and prices are expected to increase by 500 yuan/ton in March. However, demand in China is strong and demand in Europe and the US is picking up, and it is expected that the rise in pulp prices will continue until Q4 2021 (1.3 million tons of Aruco and 1.5 million tons of Bracell will all be put into production in Q4 in 2021).

At the same time, the finished paper market frequently issues price increases. Data shows that on February 18, a new batch of original paper and cardboard price increase letters arrived. On February 19, the scope of price increases gradually expanded. Small and medium-sized paper companies from all over the world followed suit, and the prices of cardboard and cartons soared. In terms of wrapping paper, the average factory prices of Nine Dragons Paper and Dongguan Jinzhou Paper were 4,280 yuan/ton and 4,180 yuan/ton, respectively; the domestic average prices of Shandong Bohui and Shandong Sun White cardboard reported 8,160 yuan/ton and 8,560 yuan/ton. In terms of cultural paper, the average price of coated paper and offset paper is 6,550 yuan/ton and 6,900 yuan/ton, respectively. In terms of white card paper, the latest factory price of Bohui (East China) white card paper was 8110 yuan/ton in February, a record high. Compared with 6,860 yuan/ton at the end of December 2020, the price increase of 1,250 yuan/ton was 1,250 yuan/ton, an increase of 18.22% in 2 months. According to some industry insiders, unlike in the past, the price increase letter issued by paper companies this time contains two price increases, with a cumulative increase of 1,000 yuan/ton. The time point for the second price increase is set at the latest in early March, fully demonstrating the popularity of the white card paper industry.

From the demand side, environmental policies such as the “ban on waste” and the “plastic restriction order” have spawned demand to replace white cardboard. Both degradable plastics and paper are alternatives to plastic products, but due to the high price of degradable plastics, there are advantages in replacing the cost of paper in many fields. Consumption of paper products such as cardboard takeout boxes and non-plastic paper cups may increase. According to estimates, disposable takeout lunch boxes may replace the demand for more than 0.7 million tons of white cardboard. From another perspective, the ban on waste will cause a shortage of raw materials, which is beneficial to integrated paper companies that supply their own raw materials. However, in the papermaking sector, Chenming Paper's industrial chain is the most complete.

Chenming Paper, the “double leader” of pulp and paper, benefits

Chenming Paper is the first and currently the only domestic paper company that produces its own wood pulp and pulp production capacity perfectly matches.

The company is a leading enterprise in the Chinese paper industry. It has now developed into a large-scale integrated enterprise group focusing on pulp and paper production lines. The products have gradually formed a series of high school product structures dominated by high-grade offset paper, coated paper, white card paper, light-coated paper, tissue paper, electrostatic copy paper, thermal paper, and glassine paper.

Furthermore, the company is also the largest wood pulp manufacturer in the country. Currently, it has three pulp mills in Zhanjiang, Huanggang, and Shouguang, with an annual production capacity of more than 4.3 million tons (paper production capacity is about 6.7 million tons). Currently, the domestic demand for wood pulp is about 33 million tons, of which only 11 million tons are self-produced, and the supply gap is around 22 million tons. With the gradual implementation of the “Ban on Abolition” and “Plastic Restriction Order”, demand for wood pulp will expand further in the future.

In the field of upstream raw materials for manufacturing wood pulp, since 2001, Chenming Paper has successively established raw material forest bases in Guangdong, Hubei, Jiangxi and other places, laying an advantageous foundation for the company in the development of the industry.

The company's rapid development and strategic layout are inseparable from Chairman Chen Hongguo.

Chen Hongguo graduated from Shandong Institute of Light Engineering in 1988. While still in school, he joined Shouguang Paper Mill (the predecessor of Chenming Paper) and served as workshop director, branch manager, deputy general manager, and company director. In December 1997, Chenming Paper and Hanyang Paper Mill underwent asset restructuring. In the face of danger, Chen Hongguo was ordered to help Hanyang Paper Mill “come back to life” and officially became the chairman of the board in 2001.

From 2001 to 2011, the company focused on the paper industry and laid out production bases, products and markets. In 2012, in a situation where overcapacity development was limited, Chen Hongguo chose a diversified strategy and began to lay out industries such as finance, fiber yarn, and port logistics. Currently, the company's revenue has grown from 2.4 billion in 2001 to over 30 billion in 2019.

Recently, the rise in both paper and pulp prices has provided strong support for the company's steady development. Since the paper industry is an industry with low profit margins, the company's revenue is large, which makes price increases and falls have a great impact on corporate profits.

The director of Chenming Paper revealed that at this stage, the company's wood pulp production capacity is about 4.3 million tons, accounting for about 41% of the total domestic wood pulp production capacity. Judging from historical experience, the rise in pulp prices is beneficial to a further rise in paper prices, while Chenming has a 90% self-sufficiency rate of pulp and is 100% self-sufficient in broadleaf pulp. Under the trend of a gradual recovery in wood pulp prices, the cost dividend of the company's homemade pulp will be expanded, and gross margin is expected to increase.

At present, the three major bases in Chenming have basically achieved “pulp and paper integration”. In 2019, the unit cost of homemade pulp is 2,916 yuan/ton, which is only 70.5% of the outsourced cost. The cost of homemade chemical pulp is about 1,200 yuan/ton lower than that of outsourced pulp. The company's gross profit for double glue/copper plate/white card is expected to be about 1500/1500/2,500 yuan/ton.

At the beginning of January 2021, the Huanggang Municipal Government also published the Environmental Impact Report for the Huanggang Chenming Paper Industry Forest Paper Integration Project (Draft for Comments). The project plans to invest 15.8 billion yuan and is located at the intersection of Yingling 2nd Road and Zhangyang Road in the Huangzhou Railway Station Economic Development Zone in Hubei (within Huanggang Chemical Park). After completion, the project will produce an annual production scale of 1.05 million tons/year of machine pulp, 0.53 million tons/year of cultural paper, 1.74 million tons/year of high-grade wrapping paper, and 1.2 million tons/year of ordinary wrapping paper. In addition, the project supports the construction of a mechanical pulp production line with an annual output of 0.52 million tons), which can realize the linkage of pulp and paper. Compared to Zhanjiang Chenming's situation (net profit margin reached 11.6% in 2019), we believe that Jiang Chenming's project may further contribute to the company's profits.

According to Chenming Paper's 2020 three-quarter report, the company achieved a profit of 0.562 billion yuan in Q3, exceeding the total profit of the previous two quarters.

On February 18, the company issued an announcement stating that the 18th interim meeting of the board of directors reviewed and passed the “Proposal on Redemption of the First Preferred Stock”. The plan is to redeem the first phase of domestic preferred shares with a scale of RMB 2.25 billion on March 17, which shows to some extent the company's management's confidence in the future of the company.

However, judging from the company's solvency, the company's total long-term and short-term liabilities are about 45 billion, short-term debt is 35 billion, long-term debt is 8 billion, and there are also 1.5 billion worth of bonds payable. The monetary capital in the company's account is 18 billion. It can be seen that the company's debt repayment pressure is huge.

The bargaining power of leading manufacturers will be further improved

Some agencies said that as the competitive pattern of the industry improves, the bargaining power of leading manufacturers may further improve, and the industry pattern continues to improve. The investment threshold for white cardboard is relatively high, and the main players expanding production are large paper companies. Furthermore, under the trend of stricter environmental protection, small and medium-sized enterprises are gradually being eliminated, and backward production capacity is being phased out at an accelerated pace, which will further increase the concentration of the white cardboard industry.

At present, APP Jinguang Paper has completed an offer to acquire Bohui Paper. The total market share of the two has reached 51%, with the highest market share; Chenming Paper and Sun Paper followed with market shares of 22% and 16%.

Paper industry market share (Source: Guojin Securities)

APP Jinguang Paper has a wood pulp production capacity close to 3 million tons, Bohui Paper has a wood pulp production capacity of 1.2 million tons, and the wood pulp self-sufficiency rate is approximately 50%. At the end of 2019, Chenming Paper had a homemade wood pulp production capacity of 4.3 million tons and a pulp and paper production capacity of 11 million tons. It is worth noting that Sun Paper also has a strong ability to be self-sufficient in wood pulp. In 2019, Sun Paper's homemade pulp production capacity reached 2.2 million tons per year, and the wood pulp self-sufficiency rate reached 67.98%.

SutraZhongtai SecuritiesAccording to estimates, at a time when the price of wood pulp increased, the increase in paper prices brought the most positive change in gross profit of Chenming Paper. For example, when the unit price of wood pulp increased by 800 yuan/ton and the price of paper increased by 1,000 yuan/ton, the gross profit of Chenming Paper increased by 2.29 billion yuan, the gross profit of Sun Paper increased by 1.12 billion yuan, and the gross profit of Bohui Paper increased by 1.65 billion yuan. However, when paper prices are fixed, the rise in wood pulp prices has had the least impact on the gross profit level of Chenming Paper. Assuming that the paper price increase is 0, the unit price of wood pulp rises by 800 yuan/ton, the gross profit of Chenming Paper is diluted by 0.68 billion yuan, the gross profit of Sun Paper is reduced by 1.3 billion yuan, and the gross profit of Bohui Paper is reduced by 0.96 billion yuan.