Since last year, the prosperity of the paper industry has continued to decline, and participants in various industries are not having a good time. Nine Dragons Paper (02689), a leader in China's paper industry, also experienced its first loss in 17 years since listing.
Recently, Nine Dragons Paper announced its results for the year ended June 30, 2023. According to the announcement, the company's revenue fell by about 12.1% year on year to 56.739 billion yuan (RMB, same below), gross profit fell 78.1% year on year to 1.53 billion yuan, losses attributable to equity holders of the company were about 2,383 billion yuan, and profit attributable to the same period last year was about 3,275 billion yuan.
In addition to performance, the stock price of Nine Dragons Paper is also under obvious pressure. The Zhitong Finance App has observed that since it hit a high level in recent years in December last year, Nine Dragons Paper has been in a volatile downward trend. On September 27, the company's stock price fell to a year-long low of HK$4.18. Compared with the high level of HK$8.19, the company's stock price was almost at a loss.
Recently, however, many industry participants, including Nine Dragons Paper, have issued price adjustment announcements. Huacheng Securities said that with the frequent price increase letters from paper companies, paper price expectations are rising at an accelerated pace, and the market is gradually picking up. Does this mean that individual paper stocks represented by Nine Dragons Paper are expected to come out of the “darkest hour”?
Industry prosperity declined and costs were inverted, and the company's profit lost for the first time in 17 years
According to the Zhitong Finance App, the company was founded in 1995 and started with waste paper recycling. It is the paper group with the second largest production capacity in the world and the largest manufacturer of raw box board paper in Asia. As of the end of June 2023, the company had a total paper production capacity of 2002 million tons and a pulp production capacity of 4.62 million tons.
Judging from the revenue structure, the company's main products include cardboard, high-strength corrugated paper, coated whiteboard paper, and cultural paper. In fiscal year 2023, each product accounted for 49.5%, 25.5%, 15.0% and 8.3% of revenue, respectively. During the period, sales of cardboard and high-strength corrugated paper increased by 5.3% and 8.6% year-on-year respectively, which successfully led to an increase of 0.2 percentage points in the revenue share of the company's two major products. However, sales volume of gray-coated whiteboard fell 10.6% year-on-year during the period, causing the product's share of revenue to drop sharply by 3.2 percentage points.
As we all know, the paper industry is a typical cyclical industry. Its level of prosperity is clearly positively correlated with macroeconomic trends, and its fluctuations are more intense than macroeconomic fluctuations. Since 2022, prices of raw materials such as wood pulp have continued to rise, while downstream demand has shrunk due to the impact of the epidemic, leading to a decline in industry sentiment. Take white cardboard as an example. In June of this year, the average price of 250g to 400g white cardboard in the domestic market was 4110 yuan/ton, down 36.38% from the high of 6,460 yuan/ton in the past two years. At the same time, although the price of pulp futures has declined from an earlier high and stabilized at around 5,000 yuan/ton, there is still a serious inversion between the price of white card paper products and the cost of pulp.
As a result, under the influence of the product price growth rate being lower than the growth rate of raw material prices, the company's profit level declined sharply, and net profit turned even more into loss. During the period, the company's gross margin was 2.7%, a sharp drop of 8.1 percentage points from the previous year. Affected by the sharp decline in gross margin and the decline in the selling price of wrapping paper, losses attributable to the company's equity holders reached 2,383 million yuan.
Furthermore, the company's cost pressure has further increased. In fiscal year 2023, in order to expand coverage and promote sales and marketing, the company's corporate promotion and distribution costs increased 8.6% year-on-year to 2.124 billion yuan. At the same time, in order to facilitate the smooth progress of the production expansion project, the company's administrative expenses increased 11% year-on-year to 2,577 billion yuan.
Steady expansion of production capacity “wait for the wind to come”
Although the industry is experiencing a “darkest hour,” Nine Dragon Paper, the industry leader, is still accelerating large-scale production capacity investment and new base construction. The company estimates that by fiscal year 2024, the company's production capacity will reach 30.9 million tons, of which paper and pulp production capacity will increase by 10% and 26%, respectively, compared to the current one.
Furthermore, it is expected that in the next three years, the company will add 13.43 million tons of production capacity, of which paper manufacturing plans to expand production by 6.85 million tons. In addition, the company will expand pulp and paper, enrich the product structure, and enter the raw material layout into the release period. The production capacity of core raw materials such as wood pulp will be released by 6.58 million tons in 23-25, of which production of wood pulp, recycled pulp, and wood fiber will expand by 3.92 million tons, 600,000 tons and 2.06 million tons respectively.
It is worth noting that the ban on waste since 2017 has made it difficult for small companies to obtain the high-quality fiber needed to make high-end boxboard paper, especially US waste. This has made it difficult for small companies in the industry to move forward and get out quickly. At the same time, as the national waste gap widens and costs remain high, this further squeezes the living space of small companies in the industry, which also frees up market share for industry leaders. In response, CICC pointed out that at present, during the industry's trough period, industry leaders continue to increase their production capacity layout. If industry demand reaches a repair inflection point, leading companies, led by Jiulong Paper, are expected to expand their wealth, and profits will gradually blossom in the new cycle.
Is an inflection point in the industry approaching?
The Zhitong Finance App noticed that after more than a year of “darkest hour,” the paper industry now seems to have ushered in the dawn of an upward reversal.
Since entering the second half of this year, the price increases of major paper companies have intensified. Leading paper companies, including Nine Dragons Paper, have issued price increase letters one after another, and large and small manufacturers all over the country have joined the price increase team. Specifically, market prices in the paper industry showed an overall upward trend, and showed characteristics such as high frequency, wide range, and variety of paper types. Data show that in mid-September this year, the average price of double coated paper rose 232 yuan/ton and 86 yuan/ton compared to July and August; white cardboard rose 419 yuan/ton and 253 yuan/ton compared to July and August; corrugated paper rose 115/ton and 116 yuan/ton compared to July and August. With the steady rise in the price of finished paper, industry profits are expected to improve.
It is worth mentioning that the wave of price increases for paper companies in September this year corresponds to the industry's traditional peak season. Unlike the disastrous performance of “Gold, Nine, and Silver Ten” last year, the market situation for the same period this year was already quite stable. Regarding the recent price increases of paper companies, some brokerage analysis points out the following points: first, the price of wood pulp rose in September; second, macroeconomic recovery and peak season stocking arrived; third, supply pattern optimization, overseas orders absorbed additional production capacity; fourth, low inventories and rising commodities, increasing downstream confidence in replenishment of demand. However, the overall market, from an exploratory price increase in early August, to reaching a comprehensive price increase agreement at the end of August, to September, corporate price increase strategies became more proactive and aggressive. This all shows the industry's overall confidence in the recovery in demand during the traditional seasonal peak season in the fourth quarter.
Guosheng Securities pointed out that at present, price increases for pulp and paper are gradually being implemented, large-scale waste paper mills are leading the way, prices are rising steadily, and profit recovery in the paper industry can be expected.
Specifically, when it comes to Nine Dragon Paper, various brokerage firms have different attitudes about the company's future trends.
Lyon pointed out that due to weak demand and high fixed costs, this led to a 12.1% year-on-year decline in sales. It is expected that the profit of Nine Dragons Paper will remain under pressure recently, mainly due to high operating and financial leverage that exacerbates weak demand, and downgraded the rating from “outperforming the market” to “selling”. The target price was lowered from HK$5 to HK$4.1.
DBS also pointed out that although the company has the ability to reach the sales target of 18 million tons in fiscal year 2024, it believes it will be necessary to make sacrifices in terms of average selling price and profit per ton. In the short term, profit per ton may be difficult to return to the average level of 350 yuan in the previous year. It is expected that profits for 2024 and 2025 will be 55 yuan and 130 yuan per ton, respectively. The bank downgraded its rating from “buy” to “hold”, and cut the target price from HK$8.38 to HK$3.96.
However, CICC maintained Kowloon Paper's “outperforming the industry” rating, while maintaining a target price of HK$6.3. It pointed out that as the industry entered the seasonal peak season and downstream entered the inventory replenishment stage, the paper mill's order acceptance situation picked up slightly and began a “slow rise in small steps” phase, and paper mill inventories were slightly removed. At the same time, since September, there has been no significant accumulation of company inventories, and paper mills have accelerated their pace of growth. Take the Nine Dragons Dongguan base as an example. Not all statistics companies have issued 7 rounds of price increase letters one after another. According to the bank's research, most of the current price increases in the middle and low end have been implemented, and there is some pressure on the rise in middle and high-end products; at the supply level, considering the concentration of new supply, the overall profit and stock price recovery of the industry may be weak compared to the previous two cycles. At the same time, the company is gradually slowing down the construction progress of some bases, has sufficient capital reserves, and a manageable balance sheet.
Overall, in the past two years, market costs have been inverted, and the profits of paper-related companies have declined or even turned into losses. “Nine Dragons Paper” are not having a good time. However, since September, as the trend of price increases among paper companies is on the rise, the paper market seems to have bottomed out and begun to pick up. At the same time, as the cost of pulp stabilizes one after another, the phenomenon of cost inversion among related companies is expected to improve. In the future, if Nine Dragons Paper, as a leader in the industry, can proactively adjust production capacity, output, and product structure to seize opportunities for industry recovery, it may not be far from the day when the company's performance regains growth.