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[table_main] 行业动态模板 Equity Research ・ Industry China pulp and paper industry: NDP vs. LMP vs. Shanying International China shaking off dependence on waste paper import. China used to rely on import for roughly 60% and 40% of its pulp and waste paper consumption respectively. However, as the Chinese government steps up environmental protection efforts, things have started to change, with the country'

s dependency on waste paper import dropping to 35.69% in

2016 from 44.25% in 2009. Stricter environmental control bodes well for pulp and paper industry leaders. Effective from the end of 2017, import of unsorted waste paper―accounting for around 20% of China'

s waste paper import―will be banned in China. Waste paper supply shrinkage will help NDP, LMP and Shanying International―having gained steady access to waste paper supply―further consolidate their predominant position in the domestic packaging paper market. As a barometer of the pulp and paper industry, waste paper price rises have led to upticks in cardboard/corrugated paper prices as well. The average price of waste/cardboard/corrugated paper in 1H17 was RMB1725.51/RMB4204/RMB3500 per ton, up 34.28%/34.76%/35.86% from RMB1285.01/RMB3120/RMB2576 per ton for the same period last year. A comparison of NDP, LMP and Shanying International. In 2016, NDP reached a production capacity of 13.68mn tons and an operating revenue of RMB32.3bn, outperforming LMP (6.16mn tons/RMB16.2bn) and Shanying International (3.54mn tons/RMB12.1bn). Earnings forecast. We estimate NDP'

s FY16-17 and FY17-18 net profit attributable to the parent company to be RMB4.5bn and RMB5.4bn, corresponding to 11.7x and 9.8x PER, and its 2017/2018 net profit attributable to the parent company to be RMB4.75bn/4.92bn. For LMP and Shanying International, our projection is a 2017/2018 net profit of RMB3.67bn/4.33bn and RMB1.612bn/1.833bn (up 349.03%/13.71% YoY), respectively, corresponding to 10.0x/8.4x PER and 14x/12x PER. [table_invest]

0421 Issuing analyst: Steven Liu, CFA, PhD, (CE No.: AMO971) stevenliu@csci.hk +852

3465 5652 Date:

6 November

2017 Share prices performance [table_industrytrend] -1% 4% 9% 14% 19% 24% 16/8/4 16/9/4 16/10/4 16/11/4 16/12/4 17/1/4 17/2/4 17/3/4 17/4/4 17/5/4 17/6/4 17/7/4 造纸 上证指数 [table_indusname] Pulp and paper

1 [table_page] Pulp and paper Industry in-depth Please read the disclaimer on the last page. Contents 1. Pulp and paper industry chain.2 2. China pulp and paper industry revenue and profit 2010-1H17.3 3. Stricter environmental control bodes well for leading domestic paper makers.3 3.1 Tightening pollutant discharge policies weighing on China pulp and paper industry

3 3.2 Waste paper sourcing shifting towards domestic suppliers due to waste import ban.4 4. Waste paper: falling dependency on import and lowering inventory push up prices.5 5. Cardboard/Corrugated paper: prices on the up.6 6. More than

20 years of NDP/LMP/Shanying International

7 6.1 NDP.7 6.2 LMP.8 6.3 Shanying International.9 7. Packaging paper major revenue generator for NDP/LMP/Shanying International.9 8. NDP a clear leader in sales-output ratio while LMP superior in net profit per ton

10 9. NDP, Shanying International and LMP respectively outperforming in operating revenue, growth rate and profitability

11 10. Historical PE and PB performance of NDP, LMP and Shanying International

13 11. Earnings forecast.14

2 [table_page] Pulp and paper Industry in-depth Please read the disclaimer on the last page. 1. Pulp and paper industry chain The pulp and paper industry converts pulp into ivory board paper, coated paper, offset paper and newsprint, and waste paper into cardboard, corrugated paper and white board paper. China'

s packaging paper market is led by Nine Dragons Paper ( NDP ), Lee &

Man Paper ( LMP ) and Shanying International. Figure 1: Pulp and paper industry chain Source: Research Dept, CSCI

3 [table_page] Pulp and paper Industry in-depth Please read the disclaimer on the last page. 2. China pulp and paper industry revenue and profit 2010-1H17 China'

s pulp and paper industry activity touched a high in 2010, when revenue and profit leapt 42.03% and 30.27% YoY respectively. Lured by such a high profitability, many small- and mid-capacity players began to jump into this field, leading to market overcapacity and dwindling earnings. In 2014, the Chinese pulp and paper industry hit a trough with its first negative profit growth in nearly ten years (down 1.44% YoY), forcing the small- and mid-capacity players to quit the market instead. In 2015, the domestic paper market bounced back to a positive profit growth of 6.20%, followed by a revenue/profit of RMB1.46874tn and RMB84.41bn in 2016, up 6.5% and 16.1% YoY respectively. In 1H17, things got even better, with revenue and net profit respectively climbing 13.8% and 41.3% YoY to RMB773.3bn and RMB47.11bn. Figure 2: China pulp and paper industry revenue and profit 2010-1H17 Source: Wind;

Research Dept, CSCI 3. Stricter environmental control bodes well for leading domestic paper makers 3.1 Tightening pollutant discharge policies weighing on China pulp and paper industry China recently released a list of industries that are required to obtain licenses before discharging pollutants, with thermal power stations and paper-making enterprises among the first to obtain such permits. There are 6,594 paper-making enterprises in China, and only 2,600 of them had been granted with the pollutant discharge permit as of Jul. 12, 2017. As China tightens its grip on pollution problems, unqualified players will gradually be winnowed out of the pulp and paper industry, leaving an increasingly concentrated marketplace boding well for industry leaders with strong muscle in capital, technologies and equipment.

4 [table_page] Pulp and paper Industry in-depth Please read the disclaimer on the last page. Table 1: Chinese authorities have issued a flurry of new environmental protection policies 时间 发布单位 相关内容 2017.1.5 环保部 明确了造纸行业的具体发证范围,要求在

2017 年6月30 日前,完成全国造纸行业企业排污许可证申请 与核发,试点北京市、保定市、廊坊市的钢铁、水泥高架源排污许可证申请与核发.从2017 年7月1日起,上述行业企业应持证排污,建立自行监测、信息公开、记录台账及定期报告制度. 2017.4.19 中央深改组 中央深改组审议通过《关于禁止洋垃圾入境推进固体废物进口管理制度改革实施方案》;

完善固体废物 进口管理制度,分行业分种类制定禁止固体废物进口的时间表,分批分类调整进口管理目录,综合运用 法律、经济、行政手段,大幅减少进口种类和数量.要加强固体废物回收利用管理,发展循环经济. 2017.5.15 环保部

2017 年5月15 日,环保部印发环办规财函〔2017〕764 号《关于进一步加快火电和造纸行业排污许可证 核发工作的通知》,对火电和造纸行业的许可制改革工作作出部署,并将启动调度及考核机制,加快核 发进度、确保核发质量、加强工作调度. 2017.7.1 环保部

2017 年7月1日,环保部开始进行打击进口废物加工利用企业环境违法行为专项行动.在7月4-9 日六 天时间内,共有

368 家企业被查出具有涉嫌环境违法行为,其中造纸企业共

36 家. Source: Wind;

Research Dept, CSCI 3.2 Waste paper sourcing shifting towards domestic suppliers due to waste import ban On Jul. 20, 2017, China'

s environmental watchdog notified the World Trade Organization about a ban on the importation of

24 types of solid waste, which means that by the end of 2017, China will forbid the importation of certain waste plastics, vanadium slag, unsorted waste paper and certain textile materials. China sold 78.5mn tons of waste paper in 2016, among them c.28.5mn tons (36.3%) imported and c.50mn tons (63.7%) recycled domestically. In Jun. 2017, 2.3847mn tons of waste paper (including 1.348mn tons of scrap cardboard paper, 97,500 tons of deinked waste paper, 532,000 tons of scrap newspaper and magazines, and 407,200 tons of hybrid waste paper) was imported, down 2.32% sequentially and 0.43% YoY. The waste paper import ban will see domestic paper makers shift their focus towards developing waste paper procurement channels at home, boding well for domestic waste paper providers which will be encouraged to improve product quality to better ride the policy tailwinds. Table 2: China'

s waste paper import Jun.

2017 废纸类型 废旧箱板纸 脱墨类废纸 废旧报纸及杂志 混杂废纸 合计 进口量(万吨) 134.80 9.75 53.20 40.72 238.47 占比(%) 56.53 4.09 22.31 17.08 100.00 进口量环比(%) -5.58 -14.07 24.25 -13.73 - 进口量同比(%) -3.54 0.45 23.64 -13.38 - 月进口金额(万美元) 33907.59 2795.03 10376.13 7624.41 - 进口均价(美元/吨) 251.54 286.67 195.04 187.24 - 进口均价环比(%) -0.59 -1.09 -9.68 -10.40 - 进口均价同比(%) 43.02 24.54 25.26 24.01 - 累计进口量(万吨) 873.79 53.70 282.68 276.51 - 累计进口量同比(%) 5.23 14.99 14.86 -6.88 - Source: Wind;

Research Dept, CSCI

5 [table_page] Pulp and paper Industry in-depth Please read the disclaimer on the last page. 4. Waste paper: falling dependency on import and lowering inventory push up prices China imported about 28.5mn tons of waste paper in 2016, down 2.68% YoY, compared with same-year waste paper consumption of roughly 79.84mn tons, up 0.77% YoY, while in 2012, China respectively imported and consumed 30.07mn and 74.79mn tons of waste paper, representing a 2012-2016 CAGR of -1.33% and 1.65% respectively, with dependency on waste paper import dropping to 35.69% in

2016 from 44.25% in 2009. Source: Wind;

Research Dept, CSCI The US and Europe are estimated to account for more than 70% of China'

s waste paper import. Figure 4: China'

s waste paper import by region (0,000 tons) Figure 5: China'

s waste paper import by region (%) Source: Wind;

Research Dept, CSCI Source: Wind;

Research Dept, CSCI Data suggest that China'

s waste paper inventory level kept going down throughout

2016 to a trough of 5.88 days in Nov. 2017, and then started to climb up to touch a high of 12.19 days in Jan. 2017, only to ease back to 8.79 days as of Jun. 30, 2017. Accordingly, waste paper prices surged all the way to RMB1736.44 per ton on Dec. 31, 2016, up 32% YoY, and then fell back to a low of RMB1303.75 per ton in Mar. 2017, followed by a hike in 2Q17 to hit a fresh record RMB1919.19 per ton as of Jul. 28, 2017, the highest since 2012. The average price of waste paper in 1H17 was RMB1725.51 per ton, a 34.28% hike from RMB1285.01 per ton for 1H16. Rainy weather in part of Southern China in July and August have put a drag on waste paper inventory, another cost push factor to drive up waste paper prices. Figure 3: China'

s waste paper import/consumption (0,000 tons) and its dependency on waste paper import (%)

6 [table_page] Pulp and paper Industry in-depth Please read the disclaimer on the last page. Figure 6: Inventory levels of scrap straw board paper (days) Figure 7: Waste paper prices (yuan/ton) Source: Wind;

Research Dept, CSCI Source: Wind;

Research Dept, CS........