Investment summary
In FY 2018, the annual revenue increased by 34.5% year-on-year to RMB 52.78 billion (the same below), and sales volume was flat at 13 million tons per year, which means that revenue growth is entirely dependent on the increase in selling price. There were several price increases after the Spring Festival, but the price per ton in the second half of the year was still 0.53% lower than the first half of the year to 4050, and the annual growth rate was still nearly 20%. Since June this year, it has been affected by the Sino-US trade war. The Chinese consumer market is more cautious. However, according to the management, the company’s sales from July to August have performed well. Since September, the prices of finished products and waste paper have been reduced. However, it is estimated that only short-term fluctuations, with the arrival of the traditional retail season, it is expected that there will be a continuous increase in November and December.
This year's peak season is not prosperous. In the middle and late October, the price of waste paper and finished paper has shown a weak decline, reflecting the sluggish downstream demand, and companies are cautious about the market outlook. Although Alibaba's online shopping platform Tmall has reached a new high in sales of the double eleven, the growth rate has continued to slow down and is the lowest ever. The market still has doubts about the authenticity of the data. Near the end of the year, the price of paper rebounded slightly, but the strength was still weak, and price cuts continued in some areas. The Chinese government has gradually relaxed its macro policy in the near future, and the results remain to be seen. We expect that the short-term industry will still face more challenges.
Taking into account the tightening of domestic waste paper policy, mainly limited to the increase in waste paper content requirements, the paper management revealed that in recent months, it has processed thousands of tons of recycled pulp (OCC) for processing in waste paper processing. To increase the rate of pulp raw materials), and hope to further increase the amount of OCC to reach 1 million tons per year from the second half of 2019. The company's newly acquired capacity of 250,000 tons of Fairmont recycled pulp in August, if it can complete the acquisition process at the end of October, will be available to the company in November.
At the same time, the Malaysian production base plans to increase the production capacity of 300,000 to 400,000 tons of recycled pulp. The United States also plans to add 300,000 to 400,000 tons. Both are currently awaiting approval from the local government. According to our preliminary estimates, the current US import OCC tariff is 20%, which is lower than 25% of waste paper. The cost of local waste paper is relatively low, and OCC is combined with processing and transportation costs, as well as customs duties. It is still about 100 US dollars per ton cheaper than domestic waste paper, and can avoid the limit of US direct import of waste paper. In terms of domestic production capacity, three of the six new production lines planned for the past three are expected to be postponed. We believe that this reflects the government's tightening of new capacity approval and environmental protection policies. At the same time, after the new capacity deployment in the early years, the paper has not been able to obtain new land and approval for expansion after 2020. On the positive side, as the leading enterprises, the delayed production capacity of the crepe paper, coupled with the policy to accelerate the elimination of backward production capacity, will help the industry supply and demand to balance, and support the product price. The management also revealed that the cancellation of the Quanzhou production line was mainly due to the tight supply of local raw materials, so it is planned to move the new paper machine to Southeast Asia. Compared with China, more overseas production capacity and market will be developed in the future, including continuing to pay attention to suitable M&A projects, and the location is not limited to the United States and Southeast Asia.
Analysts believe that in the short-term, there are many uncertainties in the market, including the fact that the supply of the industry is still sufficient, the import waste paper policy continues, and the US import tariffs will put pressure on the production costs of enterprises, but the paper as an industry Leading, I believe that performance can still be better than peers. At the same time, its strategy of expanding production capacity overseas is believed to be able to see results in the medium and long term, including the relief of domestic production costs.
Company Overview
2018 financial year performance review
FY 2018 Results Review The gross profit margin for FY 2018 was slightly lower than our expectation, rising only 1.58 percentage points year-on-year to 21.95%, which means that the gross profit margin in the second half of the year narrowed to 19.52% from 24.52% in the first half of the year. Marketing and administrative expenses accounted for 4.4% of revenue, down 0.6 percentage points year-on-year, reflecting effective cost control strategies and meeting our expectations. Operating profit margin improved by 3.01 percentage points year-on-year to 19.77%, and adjusted profit per ton of paper increased to 605 year-on-year.
Benefiting from the control of financial expenses, lower exchange losses, and effective tax rates, profit attributable to equity holders increased by 79.03% year-on-year to 7.848 billion. Excluding the exchange loss (net of tax) of operating and financing activities of approximately 20.7 million, the profit attributable to equity holders increased by 65.1% to 7.868 billion.
Add overseas production capacity and market layout
The proportion of domestic and imported waste paper in FY18 was 56% to 44% last year. The management said that it is difficult to estimate the proportion of the next two years in the short term, mainly considering the unpredictability of the policy environment, but it is expected in the long run. More than 50% is less than 50%. If imported waste paper can be used as much as possible, its quality and price are better than national waste. From July to December last year, the company's waste paper ratio in the United States exceeded 50%, and in January-June this year, it was only 10%. From May to June, it was affected by tariffs and other issues, and American waste was almost impossible to import into China.
Waste paper raw materials account for 70% of the cost, and raw wood pulp accounts for less than 30%. Ooki paper acquired two pulp mills in Rumford and Biron, USA, mainly for the production of high quality finished pulp, and can produce an additional 120,000 tons of raw wood pulp. To the local market. The company plans to increase the production capacity of raw wood pulp in the next two years, as well as reduce the supply of existing unprofitable customers, and it has sufficient capacity to supply the Chinese market.
Delay in domestic production capacity
According to the new capacity plan, in addition to the Chongqing and Xiangyang projects, the projects were put into operation in the fourth quarter of this year and the second quarter of 2019, respectively. Others have delayed the Quanzhou Phase II and Hebei projects that were originally put into operation in the fourth quarter of this year. Both were delayed until the second quarter of 2019, while the Dongguan project was delayed from one season to the third quarter of 2019.
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