Investment strategy of the hottest Paper Industry

Paper industry: industry investment strategy valuation map of China's paper industry

three core elements of paper valuation

element derivation logic as the core of valuation, profitability can be reflected through gross profit margin and asset turnover. Gross profit margin depends on product cost and price, which becomes the starting point for further deriving the core elements of paper industry valuation; The turnover rate of assets reflects the operating efficiency of the company, which we classify as the competitiveness factor of the company

we first give the derivation block diagram of the three core elements of domestic paper industry valuation - raw material control, industry competition situation and company competitiveness, and then explain them one by one

element 1: raw material control in terms of the cost of affecting gross profit margin, we can see from the development process of domestic paper industry:

in the 1980s, when straw pulp was an important raw material at the low consumption level, the paper industry in agricultural provinces such as Shandong and Henan developed rapidly, which benefited from the relatively rich wheat straw resources in the region, which gave enterprises a strong low-cost advantage; Since the 1990s, when paper products tend to be high-grade and wood pulp and imported waste paper have become important raw materials, China has had to import a large amount of pulp due to lack of pulp (the current import dependency is 67%). Enterprises have the same cost base to seek a balance between the invisible hand and the visible hand. The scale expansion has achieved large enterprises such as Chenming Paper (5.60,0.07,1.27%), Huatai Co., Ltd. (13.09,0.08,0.61%), sun paper and so on, During this period, there were basically no enterprises with raw material control power. At that time, the overall market supply was in short supply, and scale was the core of competitiveness

the control power of wheat straw is actually at the level of cost origin. Its fading out stems from the market upscale and environmental protection requirements. The scale plays a role as a source of phased competitiveness in the development of the upscale market. At the beginning of this century, the forerunners engaged in the integration of Forest Pulp and paper under the guidance of policies will reset the source of industry competitiveness and raise it to a higher level - Forest Pulp control power

domestic forest pulp paper integration pioneer companies include Yueyang Paper (11.29,0.36,3.29%), app and Stora Enso, whose costs are better than those of "workshop type" companies that lack upstream or adopt quasi integration, and the industrial competition pattern will undergo a major change

from this, we derive the first element of Paper Industry Valuation - raw material control

element 2: industry competition situation in terms of product prices that affect gross profit margin, the market supply and demand relationship is the object of investigation, which is divided into two situations: one is the natural supply and demand relationship of the market; The second is that the company relies on technological progress to take the high-end product route or implement differentiation strategy in order to seek the sub market with insufficient competition and obtain reasonable prices. The representative company is sun paper

in addition to high-strength Kraft linerboard and high-strength corrugated base paper, all major types of paper in the domestic paper industry have been surplus to varying degrees, and the price competition tends to be fierce, which has only occurred in recent years. When the capacity expansion rate exceeds the demand growth rate, as the high-strength Kraft linerboard and high-strength corrugated base paper market, which is still in the stage of short supply, its surplus will also occur sooner or later, and the profitability of its representative companies Nine Dragons Paper, Liwen paper and Jingxing paper (6.71, -0.01, -0.15%) will decline, so the downward valuation can be expected

this leads to the second element of Paper Industry Valuation - industry competition situation

element 3: company competitiveness in the same market segment, the profitability of each company varies due to different competitiveness. A typical example is Huatai Co., Ltd. in the paper industry, which enjoys obvious advantages of low cost and high efficiency in the industry with its perfect governance structure

from this, we lead to the third element of Paper Industry Valuation - company competitiveness

importance ranking of elements in these three valuation elements, we can rank them from the above differences in their impact on the profitability of the company. As the gross profit rate is a systematic variable of the industry, its influence degree is generally stronger than the competitiveness factor of the company, so the importance order of the factors is: raw material control power - industry competition situation - company competitiveness

this sort of ranking is meaningful. The ranking of the valuation results of each company calculated in the following chapters just follows this sequence

we emphasize that the most important factor of raw material control is that it will become the biggest driving force to improve the profitability of the paper industry at this stage and in the future, which will lead to changes in the competitive pattern of the domestic paper industry, that is, "whoever gets the forest pulp, wins the world". In fact, the control of raw materials should be attributed to the competitiveness of the company, but based on the above, it plays a significant role in the current valuation and industrial development, we list it separately

the "integrated" company of paper valuation territory Yueyang Paper and Nine Dragons Paper

Yueyang Paper (600963)

Yueyang paper now has 630000 mu of equity forest land. After the completion of this private placement, the equity forest land will increase to 1.05 million mu. Due to the planting first mover advantage and regional advantage, the gross profit margin of the company's timber sales is expected to be about 45%. The profitability of the company's assets will be significantly improved whether the direct sale of wood is adopted or the transformation of pulp and paper production is adopted (we calculate that roe in the semi dominant period is 13-21%, while roe in 05roe is 9.1%). More importantly, the low-cost advantage will also make it easy for the company to win in the new competitive environment of the industry

Nine Dragons Paper ()

Nine Dragons Paper's strong profitability is not only due to the fact that its high-end kraft liner and corrugated base paper market is still in short supply, but also due to the fact that it also has waste paper control power - the major shareholder Zhongnan company has many waste paper packaging plants in the United States, which directly controls most of the OCC in the United States. "Waste paper is a forest"

the companies discussed below are not upstream at present. Although some companies have equipped pulping production lines, wood still needs to be purchased; Or it owns the agreement forest land without property rights, and only belongs to the "quasi Forest Pulp paper integration" company. In order to distinguish the "integration" company, we collectively call it "workshop type" company

"workshop type" (annexation and reorganization of small and medium-sized enterprises I: technical advantages) Company - Sun Paper Sun Paper (002078) has two favorable conditions for a high valuation level:

technical advantages: since the mid-1990s, it has produced coated paperboard. Through the introduction and absorption of foreign advanced equipment and technology and its own exploration, it has mastered the relevant technology, and further developed it into the core technology of the company, with product quality leading in China. Cigarette card is the product with the highest gross profit rate in the domestic white card market at present, and its market occupies the first place. It will further improve the gross profit rate after the liquid bag is put into operation. The effect brought by technological advantages is like that the products are sold in the sub market of insufficient competition, and the profitability is stronger than that of the competitive market

efficient operation: the company's operating indicators are several times higher than those in the industry, which is caused by comprehensive factors such as technology, system and management. The rapid asset turnover makes roe=28~30%, twice the top 15% of listed peers. We expect roe to rise and stabilize at 15-18% after its listing

we are optimistic about the long-term valuation of sun paper because the technological advantage of making the aircraft lighter can promote the high-end or differentiation of products, so that we can still enjoy the insufficient competition at the top of the market even in the highly competitive market. Therefore, it will have a more stable valuation level than companies that lack technological advantages and whose profitability declines with the market surplus. We call technology a "stabilizer" of paper valuation

"workshop type" (II: good market) Company - Jingxing paper Jingxing paper (002067) valuation favorable factors are mainly reflected in the high-end Kraft linerboard and corrugated base paper market where it is still in short supply. As the market surplus is inevitable, if Jingxing paper cannot obtain the corresponding competitive advantage in the future, its valuation level will decline

"workshop type" (III: market surplus) companies - Huatai shares, Chenming paper

Huatai shares (600308)

at present, there are great differences in the valuation of Huatai shares in the market, and we believe that its current stock price roughly reflects its reasonable value. We first give its valuation, and then explain the two main differences

difference 1: the valuation level of Huatai shares is too low, because it is far lower than the p/e of the same paper companies listed in Hong Kong, such as Nine Dragons Paper and Liwen paper, which are 20-30 times

our view:

a simple comparison of the p/e of the stocks of the two companies is likely to lead to a valuation "trap": the relative undervaluation level of Huatai shares has its deep roots. Compared with Nine Dragons Paper and Liwen paper, Huatai No. 1 has no control over raw materials; Second, it cannot reflect the industrial technological advantages (in fact, as a bulk paper product with homogenization and low technology content, the source of competitiveness cannot obtain more from technology); The third is the surplus of the paper industry (we estimate that the surplus time will not end before 2009, and the future improvement will still be temporary. We reiterate that the surplus will be the normal in the growth process of the paper industry. We have discussed it in detail for many times, and will not repeat it here). These high-level factors that determine the valuation of the paper industry, Huatai shares, do not have, so they lack the basis for the high valuation level

.. The valuation comparison in the international market should be more cautious: due to differences in political stability and economic growth level, different countries or regions have different expected rates of return on investment, or different reverse company capital costs. As a global financial market, the country (or region) risk of Hong Kong is lower than that of the mainland, which is internationally recognized, so its discount rate is currently lower than that of China. In order to eliminate the difference of listing places, the same discount rate must be adopted. If the current average discount rate of domestic paper industry is adopted, the valuation level of Nine Dragons Paper will be slightly reduced, while Liwen paper will be reduced from 22.6x to 19.4x

.. Make a limited increase in valuation on the low-level valuation elements: just like you can't expect tortoise to really outperform rabbit, Huatai's DNA determines that it can only achieve a better valuation level on the low value element of the company's competitiveness. This 13X p/e is lower than the lowest 17x of the above-mentioned company, but it can be at the top in the "workshop type" (III: market surplus) company, which benefits from its competitiveness. Therefore, There is no doubt that Huatai Co., Ltd. is a company with excellent business quality

the undervaluation level is not undervaluation: as a reminder, we won't say more

difference 2: Huatai shares has excellent performance, with an annual growth of 20%, and should enjoy a high valuation level

our view:

accounting profit growth is conditional on improving Valuation: take the capital cost Ke as the benchmark, and if the profitability is greater than Ke, growth will improve valuation; Equal to Ke, the growth is invalid; Less than Ke, the faster the growth, the greater the loss of value. In terms of the future development trend of the paper industry, the profit margin will decline, and the profitability of Huatai shares will gradually approach and be lower than Ke, which means that the same profit growth will create less and less value in the future, while the dependence on new capital remains, and the result of profit discount is the current p/e. Therefore, assuming that the current profitability remains unchanged or an optimistic decline and supporting a 20% profit growth, the result will overestimate its value

profit growth is increasingly constrained by capital: in the past two years, the strategic continuous scale expansion of Huatai Co., Ltd. has rapidly increased its debt ratio from 42% at the end of 2004 to 63% at the end of the third quarter of this year. The profitability of unit capital investment or production capacity has declined, that is, the driving efficiency of capital to profitability has declined. This trend will continue. At the same time, the withdrawal of capital