Investment summary:
Industry Overview: there are many kinds of paper, the growth rate is differentiated, and the concentration of market segments is high. Special paper is different from bulk paper and household paper. It is the general name of many kinds of paper with specific properties or functions and meeting the material needs of specific fields. The overall growth of special paper industry is relatively slow, and the output in 2019 increased by only 3.74% year-on-year; However, the output growth of different kinds of paper is obviously differentiated, and the output of mainstream special paper such as food packaging paper, grasin paper and thermal paper increases rapidly. Special paper producers are mainly special paper enterprises focusing on one or more subdivided fields. At the same time, there are also some large paper enterprises. The overall competition pattern of the industry is scattered. In 2019, 11 major special paper enterprises accounted for only 40%; However, from the perspective of subdivided areas, the market concentration of a single paper is relatively high. We believe that it is mainly due to the limited market capacity of a single paper and the existence of certain technical barriers and channel barriers in the industry. The profitability of special paper is relatively strong, and the gross profit per ton of some kinds of paper has increased steadily. We think it may be due to the high landscape and good market competition pattern of some special paper.
Driven by the superposition of downstream market expansion and policy factors, the demand for subdivided special paper continued to grow rapidly. In 2019, China’s per capita consumption of specialty paper is 4.4kg, which still has room for growth compared with the annual per capita consumption of 10kg in North America. We expect that the demand for subdivided paper such as food packaging paper, gracine paper and thermal paper will maintain a rapid growth.
Food packaging paper: the downstream market is growing rapidly, and the plastic substitution policy accelerates the application of paper packaging. Food packaging paper is divided into container packaging paper and non container packaging paper. The output scale of container packaging paper is about 2 million tons. It is expected that the demand growth rate will reach 15-20% before 2025, corresponding to an increase of about 1.7-2.4 million tons from 2022 to 2025. We expect that the driving factors for the growth of the industry include: (1) the growth rate of current consumption may exceed 20% in the future, driving the demand for paper cups and straw paper; (2) The number of takeout delivery orders is expected to maintain a compound growth rate of + 18% before 2024, driving the demand for paper packaged lunch boxes; (3) The plastic restriction order promotes the substitution of paper containers for non degradable plastic containers. (4) Domestic alternative demand for liquid packaging paper.
Grasin paper: the mainstream backing material for self-adhesive labels, benefiting from the growth in the demand for commodity labels and electronic face sheets. Grasin paper is the mainstream backing material for self-adhesive labels. In 2020, the output of self-adhesive labels in China was 7.72 billion square meters, with a compound growth rate of 10% in three years; The output of glasin paper also increased to 389000 tons, with a compound growth rate of 20% in three years. China’s per capita self-adhesive label production still has room to improve compared with the developed regions in the world. In the future, the growth rate of glasin paper demand is expected to reach 15-20%. We expect that the driving factors of industry growth include: (1) consumption growth drives the increase in the use of commodity labels; (2) Express electronic face orders benefit from the rapid development of e-commerce.
Thermal paper: the demand for label and cashier printing is expected to continue to grow. Thermal paper is widely used in the printing of cashier receipts, variable information label surface materials, bills and so on. In 2020, China’s thermal paper consumption will be 490000 tons, with a compound growth rate of about 7% in three years; The per capita consumption is 0.35kg/year, and there is still much room for growth compared with Europe, America and Japan. We expect that the industry growth drivers include: (1) the development of e-commerce drives the demand for thermal paper express orders; (2) The development of the retail industry drives the demand for thermal labels and cashier receipts.
Leading enterprises actively expand their production and usher in the growth of income scale and the improvement of cost advantage. Since 2018, China’s leading special paper enterprises have successively raised funds and invested in new production capacity projects to achieve revenue and performance growth. Since 2020, leading specialty paper enterprises have successively announced a new batch of planning projects. In the next few years, it is expected to achieve large-scale capacity expansion in many high boom specialty paper fields, lay a foundation for long-term growth and consolidate their market position. The planned capacity of Xianhe Co.Ltd(603733) and Quzhou Wuzhou Special Paper Co.Ltd(605007) reached 4.9 million tons and 7.24 million tons respectively, corresponding to a compound growth rate of about 25% in the next 7-8 years. At the same time, leading paper enterprises also invest in the construction of large-scale pulp production capacity, which is expected to improve their profitability by virtue of pulp and paper integration.
Key companies in the industry:
Xianhe Co.Ltd(603733) : one of the largest special paper enterprises in China, and holds 50% equity of Xiawang paper, the leader of decorative base paper. Its products have up to 6 series, mainly including daily consumer materials, food and medical packaging materials, decorative base paper, etc. In recent years, the continuous release of production capacity has promoted performance growth, and the planned production capacity of 4.9 million tons has laid the foundation for long-term growth.
Quzhou Wuzhou Special Paper Co.Ltd(605007) : China’s leading food packaging paper and grazin paper enterprises have established close cooperative relations with top packaging materials, Tongyi packaging, self-adhesive label and Ellie Denison. At the end of 2021, the company put into operation 500000 tons of food cardboard production capacity, which is expected to be gradually released from 2022 to 2023. At the same time, the company plans to have a production capacity of 7.24 million tons, which is expected to be gradually completed in the next 8 years.
Hangzhou Huawang New Material Technology Co.Ltd(605377) : China’s leading manufacturer of medium and high-end decorative base paper, the new production capacity is expected to gradually land from the beginning of 2022 to September 2023, with a clear pace of expansion.
Risk tip: macroeconomic fluctuations affect downstream demand, raw material costs fluctuate sharply, enterprise capital expenditure is lower than expected, and industry competition intensifies.
