Packaging paper prices have been successfully increased for 10 rounds in half a year, and paper prices are more supportive in the peak season in the second half of the year.

Introduction: the prices of most periodic products have gone up this year, and paper is no exception. But despite the rise in paper prices, there is still a decline in the performance of paper companies. For the manufacturing industry, this year’s performance is obviously affected by public health events, and so is the paper industry. 
As one of the leaders in the paper industry, Liwen Paper said in its financial report that the company’s first-half results were affected by public events and both revenue and profit fell. Although even Liwen’s performance is not optimistic, for the second half of the market, a number of institutions are unanimously optimistic. They believe that nearly ten rounds of price increases have been completed in the first half of the year, and the price of packaging paper in the peak season at the end of the year is more supportive. 
I. on performance. 
1. The Medium-term net profit of Liwen fell 16.6% to HK $1.4 billion compared with the same period last year, and wrapping paper revenue fell nearly 15%. 
Liwen Paper (02314) reported interim results for 2020, with revenue of HK $11.07 billion for the group period, down 14.5 percent from the same period last year. Of this total, wrapping paper revenue was HK $9.018 billion, down nearly 15%, while toilet paper revenue was HK $2.047 billion, down more than 12%, the Hong Kong Business Daily reported.

During the reporting period, the company’s gross profit was HK $2.1656 billion, down 7.36 percent from a year earlier. Net profit was HK $1.4 billion, down 16.6 percent from the same period last year. The profit attributable to the owners of the company was HK $1.336 billion, down 20.5 percent from the same period last year. Earnings per share were HK30.68 cents, with an interim dividend of HK12 cents per share.

According to the announcement, the group’s total sales for the six months ended June 30, 2020 was 2.78 million tons, with an average net profit of HK $50 per ton of products.

In addition, as of 30 June 2020, the total shareholder capital of the Group was HK $25.553 billion (31 December 2019: HK $26.083 billion). As of 30 June 2020, the Group’s current assets amounted to HK $11.898 billion (31 December 2019: HK $12.491 billion) and current liabilities amounted to HK $9.139 billion (31 December 2019: HK $8.46 billion). The current ratio was 1.30 as of 30 June 2020 and 1.48 as of 31 December 2019.

Second, about the price of paper.

2. The medium-term sales volume, selling price and net profit of Liwen declined compared with the same period last year, and the price and profit in the second half of the year are.

For the decline in the medium-term performance of Liwen Paper, China International Capital Corporation analyzed and said:

1) sales fell slightly due to the sluggish demand. The national demand for packaging paper continued to be suppressed by the epidemic in the first half of 2020, and the national production of containerboard and the corrugated paper fell by 8% and 10% respectively compared with the same period last year.

2) the price of the product and the net profit per ton decreased compared with the same period last year. Dragged down by weak demand, the average price of corrugated paper in the industry fell sharply in the first half of the year. The average price of finished paper during the reporting period was 3982 Hong Kong dollars per ton, which was also down by about 14% compared with the same period last year (also due to the depreciation of the RMB by about 5%). The net profit per ton fell 94 Hong Kong dollars year-on-year to HK $505, a low level in the past three years.

3) the expense rate and net debt ratio have increased. Due to Liwen Paper’s efforts to expand the Southeast Asian market, the company’s sales expense rate and management expense rate increased by 0.7ppt and 1ppt to 2.8% and 4.5% respectively during the reporting period, resulting in a year-on-year increase of about HK $30 to HK $291 per tonne of sales and management expenses. The net debt ratio also slightly increased to 41% compared with the end of 2019.

4) the dividend yield is attractive to a certain extent. Liwen Paper pays an interim dividend of HK12 cents, which is increased by 5ppt to 39% compared with 1H19. If the dividend ratio is maintained throughout the year, the dividend yield of 2020e is 6%, which is attractive to a certain extent.

At the same time, China International Capital Corporation believes that Liwen Paper’s performance in the first half of the year is dragged down by weak demand, and its performance is expected to improve month-on-month in the second half of 2020.

In early July, the demand for boxboard corrugated paper, the main product of Liwen Paper, recovered, and the price of waste paper at the cost side rose. Leading paper mills pushed the price of box tile paper to a continuous high. From July to August, the average price of box tile paper in the industry was 7% higher than that of 3Q19 (the average price of box tile in vs. 2Q20 industry was down 9% from the same period last year).

Looking forward to the second half of the year, China International Capital Corporation Research Institute believes that the downstream demand of the industry is still recovering, and the peak season in the fourth quarter is just around the corner, while waste paper prices are steadily rising and continue to be strong, forming a strong support for paper prices. Liwen Paper 2H20 performance is expected to improve month-on-month. Demand is expected to recover further in 2021, but there is more supply or room for price repair.

3. Nearly ten rounds of price increases have been completed in the first half of the year, and the price of packaging paper is supported in the peak season at the end of the year.

According to Zhitong Financial report: due to the impact of public health events, triggered a phased mismatch between supply and demand, paper prices have seen a sharp rise. In March this year, there was an extreme shortage of packaging paper raw materials, leading to a big rise in paper prices, but this phenomenon is only a flash in the pan. As the operating rate of the paper mill increases, the supply of the paper mill increases, and the downstream demand is still weak, so paper prices begin to decline all the way again.

Since late May, downstream demand began to improve, to the end of July packaging paper has completed nearly ten rounds of price increases, but this price increase did not continue,but fell again at the end of July.

Take corrugated paper as an example. Wind data show that the national market price of corrugated paper rose from 3547.3 yuan/ton at the beginning of the year to 3710.7 yuan/ton on July 31, with a price increase of nearly 164yuan per ton. Although the price of corrugated paper per ton has risen significantly this year, compared with the same period last year, as of June 30, 2020, the price of corrugated paper has fallen by an average of 4.4%. There was a sharp rise in July, with prices rising more than 10 percent per tonne compared with the same period last year.

In the short term,the corrugated paper has risen a lot, and there is still a question mark over whether it can continue to rise, because there is no significant improvement in downstream demand.

Although the price increase of corrugated paper is doubtful, it is difficult for the price to fall sharply. The Mid-Autumn Festival is usually the traditional peak season for paper. This year’s Mid-Autumn Festival falls on October 1, which is later than in previous years, so taken together, paper prices may remain high. For Liwen Paper, as long as the paper price does not fall, the price can rise compared with the same period last year, that is, the company’s performance may have a relatively good improvement in the second half of this year.

First Shanghai Securities also believes that since late May, downstream demand has begun to improve, and nearly ten rounds of price increases for packaging paper have been completed by the end of July. Unlike in the past, this round of price increases shows the characteristics of large increases and high frequency, indicating that the downstream acceptance is relatively high. Demand recovery is good. Due to the recent large increase in paper prices, it believes that paper prices may fluctuate at high levels in the short term. at the same time, this year’s Mid-Autumn Festival falls on October 1, which is later than in previous years. First Shanghai Securities believes that the start of this year’s traditional peak season will be later than in previous years, but will not be absent and remain optimistic about the market in the second half of the year.

III. On production capacity.

4. The domestic expansion of Liwen Paper has slowed down, and its production capacity has increased by only 5000 tons in the whole year of the reporting period.

Compared with the announcement of Liwen Paper, it is found that the expansion of Liwen Paper has slowed down significantly in the past year, and the company’s annual production capacity has only increased by 5000 tons of toilet paper compared with the same period in 2019. The total production capacity of the company is 6.18 million tons of cardboard paper, 180000 tons of wood pulp and 900000 tons of toilet paper.

In terms of revenue composition, Liwen Paper earned HK $11.071 billion in the first half of 2020, of which packaging paper revenue was HK $9.018 billion, down 14.89% from the same period last year, accounting for 81.45% of the company’s revenue, down 0.39% from the same period last year. Toilet paper revenue was 2.047 billion Hong Kong dollars, down 12.89% from the same period last year, accounting for 18.49% of the company’s revenue, up 0.34% from the same period last year.

Since 2018, the mainland packaging paper business has shrunk relatively due to the impact of Sino-US trade, and since 2017, mainland China has introduced policies to restrict the import of waste paper. The introduction of relevant restrictions has limited the supply of raw materials to a certain extent, which has a certain impact on the domestic paper industry, and the company’s waste paper recycling has been affected to a certain extent.

Due to the decline of the packaging paper business, the promotion of the toilet paper business has become the strategic development direction of Liwen. Therefore, the company proposed to attach importance to the household paper business, has achieved the full product chain building. Overall, the company’s toilet paper business is developing steadily, with a total annual production capacity of 900000 tons. With the improvement of the toilet paper business, the company’s overall gross profit margin has also increased accordingly, and the company’s gross profit margin has increased to 19.6% from 18.1% in the same period.

Dr. Li Wenjun, Chairman of Liwen Paper, said: “in 2020, the paper industry is still facing certain pressure, trade frictions between China and the United States are still continuing, and paper costs are rising, affecting consumer confidence. Liwen Paper actively responds to market changes and has been committed to developing a vertical business model covering pulping and waste paper recycling through the active integration of upstream resources to ensure the supply of raw materials through the integration of the industrial chain; at the same time, we continue to expand our scale, control costs and increase production capacity on the basis of our existing business, bringing more business growth opportunities for the Group. “

Mr. Li Wenbin, CEO of Liwen Paper, concluded: looking forward to the future, the Group will actively optimize the industrial chain in order to realize the diversification of the paper and pulp business. At the same time, on the basis of the original production scale, the Group responded to the “Belt and Road Initiative” strategy, aimed at the Southeast Asian market, expanded the international industrial layout, and increased new production capacity. In the future, the Group will continue to explore business opportunities in “Belt and Road Initiative” countries and cities, and have confidence in the long-term development of “Belt and Road Initiative”. It is believed that the Group can bring the greatest benefits to shareholders.

5. Small paper mills will be forced to reduce production or even withdraw in 2021, and Liwen is expected to benefit from the improvement of the market structure.

China International Capital Corporation expects the demand for box tile paper to recover further from the impact of the epidemic in 2021, but at the same time, the industry has a large production capacity of box tile paper (as of June 2020, China International Capital Corporation estimates that projects under construction / proposed but not put into production have a capacity of more than 16 million tons, accounting for nearly 30 percent of the industry’s production capacity), or suppress the space for paper price repair in 2021.

  At the same time, according to the regulations on the import of solid waste, the import quota of imported waste paper will be reduced to 0 in 2021. Although Jiulong, Liwen, Shanying and other industry leaders have arranged overseas waste paper pulp capacity to replace solid waste paper import, China International Capital Corporation expects that the raw material supply of waste paper in the industry will still be tight in 2021. Small enterprises may be forced to reduce production or even gradually withdraw from the market due to the double squeeze of rising raw material costs and lack of raw materials. As one of the leaders in the industry, Liwen Paper is expected to benefit from the improvement of the market pattern.

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