Since the end of November last year, the gross profit per ton of the entire industry has started to climb rapidly, driving paper companies' net profit per ton in the second half of 2016, and most companies have issued profit forecasts. Since the end of November, the price of cardboard paper has increased by 26%, the price of corrugated paper has increased by 39%, and the price of white paperboard has increased by 16%; in addition, the price of coal has started to decline after reaching a high level in mid-November, which also contributes to the improvement of profit margins.
The stock price also reacted positively to this month's earnings surprise. However, we recommend investors to remain cautious and switch to the off-season mode, because profit margins may decline in the first half of 2017 and the risk of triggering a further expansion of production capacity has become apparent. The cyclicality of the paper industry may not be easy to change, even in capital market transactions, just as valuation multiples will hover around benchmark price-to-book ratios based on price and profitability prospects during peak and off seasons. Therefore, possible overcapacity may threaten revaluation opportunities in the paper industry.
reason
The gross profit per ton began to decline in January. The unexpected increase in gross profit since the end of November last year was mainly due to the low-priced domestic waste paper (1 month) and overseas waste paper (2 months) inventory of paper companies that delayed the impact of rising costs. At the same time, we have also noticed that some paper mills that have stopped production use stockpiling to resell paper products during the peak season when paper prices are rising, which has contributed to the rise in paper prices.
Industry data shows that domestic waste paper prices rose by 19% in December last year, while they fell by 3% in January; from November to December last year, the price of imported waste paper rose by 8% (in U.S. dollars), followed by a further increase of 4% in January. In January, paper prices remained stable. This shows that the declining trend of gross profit per ton in the first four weeks of this year has emerged, because the rising price of waste paper has increased the accounting costs of paper mills, while paper prices have remained stable.
Encouraged by high profit margins, paper mills are surging in expansion. According to our preliminary statistics, we will add 3.3 million tons of containerboard production capacity in 2016; according to the capacity plan announced by paper manufacturers, the new capacity will be expanded to 5.1 million tons in 2017, and 11 million will be added in 2018 and 2019. Tons of new production capacity.
The trading multiple of the stock price of paper companies hovered around the historical average value of the price-to-book ratio. During the peak season of the second half of the year, it would slightly exceed the average value and fall back during the off-season of the first half of the year. Based on our adjusted earnings forecast, the current share prices of Nine Dragons Paper and Lee & Man Paper correspond to the current year’s price-to-book ratio of 1.3 times and 1.5 times respectively (the historical average value of the price-to-book ratio is 1.2 times and 1.5 times respectively), indicating that the recent valuation has Higher. The recommendation is maintained based on the stable growth prospects of the two companies and the dividend yields of about 3%. Although the profit per ton during the off-season has a downward trend and the risk of overcapacity has increased, it may mean that the market will further push up the market in the near future. The share prices of the two companies will remain cautious.
