Source: Bread Finance
A few days before Lunar New Year's Eve, Paper Giant Dragon Paper released a six-month profit warning as of December 31, 2018.
The announcement shows that after excluding the impact of exchange losses (excluding taxes) on operating and financing activities, it is expected that the profit attributable to equity holders during this period will be no less than RMB 2.4 billion, a decrease of approximately 45% from last year, mainly due to The rise in raw material prices and the decline in product prices.
However, the company's share price did not fall as much as performance, but after opening lower and closing down 2.53%, the next day it regained lost ground and hit a recent high.
Since February 2019, the share price of Nine Dragons Paper has risen 11.06%, outperforming the HSI.
Is it because investors think that the sharp decline in the company's previous share price has already reflected the performance of this period or is there another reason?
Paper industry giants, step-by-step expansion of production capacity
Founded in 1995, Nine Dragons Paper is the largest manufacturer of boxboard base paper in Asia. Its products include cardboard (cattle cardboard, environmentally friendly cattle cardboard, white-faced cattle cardboard and coated cattle cardboard), high-strength corrugated paper, Coated gray-white board, eco-friendly cultural paper (including offset paper, copy paper, etc.) and specialty paper. In the fiscal year 2018 (from the beginning of July 2017 to the end of June 2018), the revenue share of the top three reached 94.2%.
As of June 2018, the Group's total production capacity was approximately 15 million tons, mainly in Asia (mainly in mainland China). The Group's packaging paper and cultural paper production capacity in various papermaking bases in Asia exceeded 14 million tons, with Dongguan, Taicang and Tianjin accounting for the largest proportion.
Combined with the company's overseas production capacity and new capacity in construction in Chongqing, Quanzhou and Hebei, it is estimated that the total production capacity of the company will reach 18 million tons after it is put into production.
In the last five fiscal years, the company's revenue increased from 29.026 billion in FY2014 to 52.964 billion in FY18. The net profit attributable to ordinary shareholders increased from 1.755 billion to 7.848 billion in the same period. However, the company's revenue and profit growth mainly comes from the last two fiscal years.
Similarly, the company's gross profit margin and net profit margin also reached the highest in recent years in 2018, which was 21.95% and 14.84% respectively.
Rising costs, falling prices, falling profits
What caused the company's revenue and profits to hit a new high in FY 2018, and immediately fell sharply?
First of all, look at the cost side. It can be seen that the price of domestic waste paper to the factory price has risen from 1,100/ton at the beginning of 2016 to a high of 3,350/ton in mid-2018. Although there has been a significant decline since the third quarter of 2018, the higher inventory costs in the previous period will still affect the company's profitability in the second half of 2018.
The company's 2018 annual report shows that inventories increased by 43.0%, involving more than 2 billion. Among them, raw materials increased by about 27.0%, and finished products increased by about 67.9%, mainly due to the substantial increase in waste paper costs.
On the other hand, affected by China's policy of strengthening waste paper control, the price of imported waste paper has also risen, raising the company's raw material costs.
Since the end of 2017, the state has successively introduced policies prohibiting the import of mixed waste paper, prohibiting enterprises with an annual production capacity of less than 50,000 tons from using imported waste paper and importing waste materials to no more than 0.5%. Take Meifei 13# as an example, its price rose from the lowest point of 175 US dollars/ton in October 2017 to 330 US dollars/ton in the middle of 2018, and remained at around US$250/ton by the end of 2018.
From the demand side, although the price of cardboard paper is still significantly higher than that in 2016, it has seen a significant decline since the second half of 2018, showing the characteristics of the peak season. Taking the average price of cardboard paper in South China as an example, after reaching a relative high of 5,554/ton in May 2018, it has fallen to about 4,500/ton by the end of 2018.
Accelerate overseas expansion
Based on the rise of domestic cost factors and the need for overseas expansion, paper manufacturers have significantly increased their overseas investment in recent years.
In August 2017, the company's Vietnam base No. 2 paper machine was put into operation, with a design capacity of 350,000 tons of cardboard, and official commercial production began in January 2018.
In June 2018, the company acquired two US pulp and paper integration plants. The pulp and paper mill in Rumford, Maine, operated three combined paper production lines with an annual capacity of 550,000 tons, while the pulp and paper mill in Biron, Wisconsin merged. The annual production capacity is 340,000 tons.
In addition, based on upstream expansion considerations, the company again signed an agreement in August 2018 to acquire a recycled pulp mill in Fairmont, West Virginia, USA, which has a pulp capacity of 220,000 to 250,000 tons.
In addition to Nine Dragons Paper, other companies in the industry have shown similar development trends. Among them, Lee & Man Paper completed the production of 400,000 tons of papermaking projects in Houjiang, Vietnam in 2017, and there is a trend of further expansion in the future.
In June 2018, another papermaking company, Shanying Paper, acquired a 100% limited partnership interest in WPT, a European waste paper and waste plastics trading company, with a total investment of 38,278,300 euros, expanding the source of waste paper channels of Shanying. In addition, Shanying announced in August 2018 that it will invest 16 million US dollars to transfer 100% of Verso Wickliffe, which will be transformed into production packaging paper and construction of waste paper pulp production line.
Long and short differences
However, not all bad news in the industry. After experiencing a large depreciation in 2018, the exchange rate of the RMB against the US has appreciated a lot since October 2018, which will help reduce the import cost of papermaking enterprises such as Nine Dragons Paper.
Overall, standing at this point in time, the market's differences are still large. Optimists believe that the static valuations of the three leading paper companies are not high, and the P/E ratio for the full year of 2018 is around six times. Moreover, with the gradual withdrawal of small production capacity since the supply-side reform, paper companies in the future will continue to benefit from capacity contraction.
On the other hand, pessimists believe that due to the increase in the price of waste paper and the slowdown in downstream demand, there will be a downward process in the profitability of paper companies, which may be premature.
Editor in charge: Ge Hongyan
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