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1、Hold,Buy,Buy,Hold,Deutsche BankMarkets Research,AsiaChinaMid&Small Caps,IndustryChinaContainerboard,Date27 November 2012Industry UpdateVivian Hao,Turning cautiously optimistic into2013Worst should be over but uncertainty remainsThe Chinese containerboard Industry hit a trough in 2012.The industry is
2、showing some signs of stabilization into the year-end with positive seasonality.Although there are still uncertainties with regard to end-demand,we believethe worst is now behind us.A sustainable and smooth industry fundamentalrecovery remains a challenge,given the lukewarm macro outlook andprevaili
3、ng industry-wide overcapacity.We believe the recent stock priceoutperformance of key players in the market is somewhat excessive,mainly,Research Analyst(+852)2203 Top picksNine Dragons Paper(2689.HK),HKD5.85Lee&Man Paper(2314.HK),HKD4.39Companies FeaturedNine Dragons Paper(2689.HK),HKD5.852012A 2013
4、E 2014E,driven by market sentiment and a liquidity pump,with industry fundamentalsstill lagging relatively behind.NDP remains our sector top pick.Accelerating industry rationalization to bring margin back on track,P/E(x)EV/EBITDA(x)Price/book(x),19.710.00.8,15.08.61.0,10.06.80.9,Historically,Chinas
5、containerboard capacity has increased at a slightly higherpace than demand,except during the short-duration macro-led supply shock in,Lee&Man Paper(2314.HK),HKD4.392012A 2013E 2014E,early 2009.However,due to aggressive capacity expansion in the past threeyears,the industry is seeing a much stickier
6、and more serious structuralovercapacity problem now.We expect the overcapacity situation in the,P/E(x)EV/EBITDA(x)Price/book(x),12.911.91.2,13.511.41.4,10.89.51.3,Chinese containerboard market to have peaked in 2012,and gradually abatethrough rebalancing from 2013 onwards on the back of:1)more disci
7、plinedcapacity planning,with the profitability benchmark back at center stage,2)long-term confidence that China remains a growth nation,with new-tier city,Key Changes TableNew Old TP TP CurrentUpside%TP(HK$)change price,consumer markets rising,3)the closure of inefficient small mills and higher,(HK$
8、),%,(HK$),entry barriers due to capacity requirements bringing margin recovery for theindustry.Industry performance outlook:turning cautiously positive,NDP(2689.HK)LMP(2314.HK),7.14.8,5.62.8,27%71%,5.854.4,21%9%,Based on the outlook indicated by our Chinese macro team,we expect end-demand for contai
9、nerboard in China to see sunny intervals on an uncertainhorizon.Key containerboard products pricing has started to stabilize from3Q12,after a two-year freefall.On the cost side,OCC prices are depressed buthave relative power against finished goods.As a result,the cash marginspread for the industry m
10、ay be stabilizing after a severe squeeze,whilst themajor players net profit per ton metrics should see improvement over time.Bite the bullet and survivors will win all;top pick Nine Dragons PaperIn conclusion,we are long-term positive on the China containerboard industrywith an expectation of a grad
11、ual and incremental industrial recovery over thenext 23 years.However,we err on the side of caution amid the optimism,bearing in mind the headwinds ahead from both global macro concerns andindustry structural overcapacity issues.Our top pick in the industry is NineDragons Paper(2689.HK),given its ca
12、pacity readiness for a strong industryrebound and undemanding valuation.We maintain a Hold on Lee&Man Paper(2314.HK),on its limited potential for capacity growth and on valuationgrounds._Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research repo
13、rts.Thus,investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors shouldconsider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072
14、/04/2012.,27 November 2012Mid Hold target price HK$4.8 per share.4Turning cautiously optimistic:survivors will win all.5Asia remains growth engine despite a stagnant 2012.5Industry at trough with overcapacity and hampered demand.6Demand demographic shift lends long-term confidence.8Industry performa
15、nce outlook:turning cautiously positive.9Bite the bullet and survivors will win all.15Nine Dragons Paper.18Lee&Man Paper.20,Page 2,Deutsche Bank AG/Hong Kong,27 November 2012Mid top pick Nine Dragons PaperIn conclusion,we are long-term positive on the China containerboard industry with anexpectation
16、 of a gradual and incremental industrial recovery over the next 23 years.However,we err on the side of caution amid the optimism,bearing in mind theroadblocks ahead from both global macro concerns and industry structural issues.Ourtop pick in the industry is Nine Dragons Paper(2689.HK),given its cap
17、acity readinessfor a strong industry rebound and undemanding valuation.We maintain our Hold on,Deutsche Bank AG/Hong Kong,Page 3,27 November 2012Mid Buy target price HK$7.1 pershareFigure 1:NDP key operating matrix,FY06,FY07,FY08,FY09,FY10,FY11,FY12,FY13E,FY14E,FY15E,ASP(RMB/Ton)Volume(MT m)Capex(RM
18、B bn)Net profit/ton(RMB),2,8632,7601.3477,3,0093,2695.5556,3,3134,2609.9370,2,4925,2683.9193,2,7916,4304.2328,3,0617,9678.3224,2,9819,1145.1117,2,86610,7943.5135,2,92212,0782.0182,2,88213,0760.8218,Source:Deutsche Bank estimates,Company dataFigure 2:NDP valuation,CY2010,CY2011,CY2012E,CY2013E,CY2014
19、,CY2015,P/E(x)EV/EBITDA(x)Dividend yieldP/BV(x)ROE,20.814.71.0%2.510.6%,13.19.71.7%1.17.0%,17.49.51.2%1.25.9%,12.17.91.6%1.18.0%,8.76.42.2%1.010.2%,6.65.12.9%0.912.2%,Source:Deutsche Bank estimates,Company dataLee and Man Paper(2314.HK);Hold target price HK$4.8 pershareFigure 3:LMP key operating mat
20、rix,FY06,FY07,FY08,FY09,FY10,FY11,FY12,FY13E,FY14E,FY15E,ASP(HK$/Ton)Volume(MT m)Capex(HK$bn)Net profit/ton(HK$),2,7441,2351.2475,2,8291,6722.7570,3,1772,6454.2527,3,0982,9961.6100,2,9803,5790.5512,3,8123,5001.8528,3,9303,6482.9370,3,5764,2961.4363,3,6194,9401.2404,3,6925,4400.9482,Source:Deutsche B
21、ank estimates,Company dataFigure 4:LMP valuation,CY2010,CY2011,CY2012E,CY2013E,CY2014E,CY2015E,P/E(x)EV/EBITDA(x)Dividend yieldP/BVROE,14.211.92.4%2.217.2%,7.88.54.4%0.911.9%,13.911.82.3%1.410.9%,11.49.92.7%1.312.2%,9.08.13.4%1.214.1%,7.16.44.3%1.116.0%,Source:Deutsche Bank estimates,Company data,Pa
22、ge 4,Deutsche Bank AG/Hong Kong,139,154,27 November 2012Mid&Small CapsChina ContainerboardTurning cautiously optimistic:survivors will win allAsia remains growth engine despite a stagnant 2012Global containerboard demand stood at 143m MT in 2011,according to RISI,and it isexpected to reach 147m MT b
23、y end-2012,representing 2.8%YoY growth(cf.5.0%CAGR over 2009-11).The expected slowing growth in 2012 is attributed to thedrastically weakened consumption demand globally,and consequently shrinking supplyof OCC from Europe and the US.However,containerboard industry recovery,though ata much more gradu
24、al pace than the 2008 rebound,is expected in the coming years,supported by a warming consumer market and the rapid development of South EastAsian textile markets.According to RISI,global containerboard demand is set to touch179m MT by 2017E,representing a healthy revival at a five-year CAGR of 4.0%.
25、The FarEast is going to tract over half of the worlds demand,as the Worlds Factory.,Figure 5:World containerboard demand(2009-2017E),Figure 6:Global containerboard demand by region,MMT200180160140120100806040,5.3%CAGR 2009-11129,143,147,4.0%CAGR 2009-11163,170,171,179,100%90%80%70%60%50%40%30%20%,No
26、rth America11%8%46%15%,Western Europe11%8%47%15%,Far East,Latin America11%8%48%14%,All Other11%8%52%13%,20,10%,20%,19%,19%,16%,0,0%,2009,2010,2011,2012E 2013E 2014E 2015E 2016E 2017E,2009,2011,2012E,2017E,Source:RISI,Source:RISI,According to RISI,Far East has surpassed North America to become the to
27、p contributorto world containerboard demand in 2001.Further,as we show in Figure 6,NorthAmerica and Western Europe have witnessed a declining market share over 2009-11and are expected to slide further over 2012-17E,due to a lack of growth in thosematuring markets.In the meantime,RISI forecasts the F
28、ar East to post strong growth of5.7%CAGR over 2012-17E,securing 52%market share by 2017(cf.46%in 2009)followed by stable Latin America,recording a CAGR of 4.2%over 2012-17E with 8%contribution to global demand(cf.0.7%and 2.6%CAGR 2012-17E of North Americaand Western Europe).Far East demand for conta
29、inerboard grew at a 7.9%CAGR over 2001-2011,making itthe fastest growing region in the world.Notably,out of the whole region,China hasbeen the core growth impetus,with its demand rising significantly over the decade at a13.8%CAGR over the same period.Going forward,RISI expects demand from the FarEas
30、t to reach 92m MT by 2017E,which is largely propelled by demand growth in China,which is projected to expand at 7.3%CAGR to touch 62m MT(67%market share)in2017E.,Deutsche Bank AG/Hong Kong,Page 5,2012E,2013E,2014E,2015E,2016E,2012E,2013E,2014E,2015E,2016E,2017E,2002,2003,2004,2005,2006,2007,2008,200
31、9,2010,2011,2017E,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,27 November 2012Mid&Small CapsChina ContainerboardIndustry at trough with overcapacity and hampered demandIndustry overcapacity to dominate in the next 1224 months but being absorbedChinas demand for containerboard stood at 40.
32、6m MT in 2011 which represented 6.2%YoY growth and a CAGR of 13.8%over 2001-11,according to RISI.98%of the demandin 2011 was catered by domestic production,which was operating at a rate of 89%,given the total capacity of the country of 44.5m MT.Due to massive capacity expansionby major producers in
33、the past two years,the output gap has steadily narrowed tobelow 1m MT and we expect this trend to continue in the coming years.Figure 7:Chinese containerboard capacity trend 2001-2017EMT m80.0,70.060.050.040.0,13.8%CAGR 2001-11,5.7%CAGR 2012-17E,30.020.010.0-Source:RISIFigure 8:China domestic contai
34、nerboard production and demand,MT m,Domestic production(RHS),Consumption(LHS),Output gap(RHS),70.060.0,2.1,2.2,2.0,2.5,50.0,1.8,2.0,40.0,1.4,1.5,30.020.0,1.0,1.1,1.1,0.8,0.9,0.9,0.8,0.8,0.8,0.8,0.7,1.0,0.510.0,-Source:RISIPage 6,-,Deutsche Bank AG/Hong Kong,27 November 2012Mid&Small CapsChina Contai
35、nerboardThe Chinese containerboard industry is fragmented in nature with the top ten playersholding 28%of the total market in 2011(Figure 9).Figure 9:Top Chinese paper and board producers by 2011,Rank,Company,Production,%change,Share*,(Tons 000),12345678910,Nine DragonsLee&ManShandong ChenmingShando
36、ng Huatai PaperSun PaperGold East Paper(APP China)China Paper CorporationNingbo Zhonghua Paper and Ningbo APP Paper*(APP China)MCC Paper Industry GroupShandong Bohuisubtotal,8,0003,6503,6142,5472,4232,2012,1001,5271,3121,16428,500,23.9%4.2%10.4%55.1%8.2%-4.7%-14.2%2.6%-5.3%16.2%,10%4%4%3%2%2%2%2%1%1
37、%30%,Source:China Paper Association,*Market share is calculated based on the total paper market sizeAs shown in Figure 10,historically Chinas containerboard capacity has increased at aslightly higher pace than demand,except in 2008 and 2011.In 2008,the industrywitnessed a capacity enhancement of 5%Y
38、oY,cf.a demand rise of 3%YoY,owing tothe global financial crisis,which hampered demand.However,the industry witnessed amore serious structural overcapacity in 2011,given the sharp increase in designedcapacity built out by the key players,such as Nine Dragons Paper(sales volume isestimated to be over
39、 10,000m MT by FY13 with a designed capacity of 13,000m MT byperiod-end)and Lee&Man Paper(sales volume is expected to exceed 4,200m MT byFY13 with a design capacity of 6,000m MT by period-end),which coincided with thedownturn in demand due to a fast returning and more sticky macro weakness,triggered
40、 by the European debt crisis.Most of these capacity scale-up projects wereinitiated when the Chinese economy was reflated in 2009 with an RMB4tr fiscalstimulus package,and only came into operation from 2011.As such,the Chinesecontainerboard market capacity reached 47m tons(+4%YoY),cf.42m tons(+2%YoY
41、)of demand in 2011.Figure 10:Chinas containerboard capacity vs.demand gap to revert,(million tonnes)5.04.03.02.01.0-,Capacity increase,Demand increase,CY02,CY03,CY04,CY05,CY06,CY07,CY08,CY09,CY10,CY11,CY12E,CY13E,Source:RISIWe believe the acute overcapacity situation in the containerboard market wil
42、l graduallyabate through rebalancing from 2013 onwards,as the industry is now more disciplined,Deutsche Bank AG/Hong Kong,Page 7,27 November 2012Mid&Small CapsChina Containerboardwith regard to new capacity additions,with profitability returning to center stage.Furthermore,highly polluting inefficie
43、nt small capacities are being forced out by thegovernment,as part of the industry rationalization process.Therefore,a more balancedsupply and demand situation should reinstate some pricing power to the leaders inChinas containerboard industry and allow them to garner the ability to pass throughinput
44、 costs hikes more smoothly over a reasonable period of time.Demand demographic shift lends long-term confidenceStructural change in the industry post 2008 financial crisisPrior to 2008,major Chinese containerboard manufacturers mainly catered to exportdemand from overseas,and also built their mills
45、in close to major port locations for theease of logistics.The focus has shifted drastically since 2008 towards domesticdemand,in light of insufficient demand from significantly deteriorating developedWestern consumer markets,and the rise of Chinese domestic consumer marketsunscathed by the financial
46、 crisis.However,the majority of raw material is still sourcedoverseas for quality reasons.Thus,the entire value chain of the Chinese containerboardindustry took a turn post 2008 and became a largely domestic demand-driven industry,focusing on end-demand from retailers for domestic sales and with new
47、 productionbases in the inner provinces,as shown in Figure 11.Figure 11:Containerboard value chain a virtuous circle,Raw material suppliersAmerican Chung Nam(ACN)Main raw materials-Recovered paper/OCC(90-100%of fiber content)Waste and recycling depot,ContainerboardmanufacturersNine Dragons Paper(268
48、9.HK)Lee&Man paper(2314.HK)Produced linerboard andcorrugating mediumEnd consumerPrior to 2008-US andEurope marketAfter 2008 crisis Demandshifting to domestic market,Box convertersHop Fung(2320.HK)Consumer productsmanufacturerse.g.electonics,toys,household.Mostly based inSouthern China,Source:RISIThe
49、 situation is explained in Figure 12 and Figure 13,which shows the sales split ofNine Dragons Paper(NDP)and Lee&Man paper(LMP),which collectively held 14%market share in 2011.In 2007,the domestic:international sales mix of NDP and L&Mwas 62%:38%and 50%:50%,whereas the mix shifted,to 89%:11%and 85%:1
50、5%respectively in 2011.,Page 8,Deutsche Bank AG/Hong Kong,27 November 2012Mid&Small CapsChina Containerboard,Figure 12:Sales split NDP,Figure 13:Sales split LMP,100%,Domestic,International,100%,Domestic,International,90%,20%,16%,14%,11%,90%,21%,19%,15%,80%70%60%50%,38%,80%70%60%50%,50%,40%,40%,80%,8
