Since the end of November last year, the gross profit per ton of the whole industry has started to rise rapidly, driving paper enterprises to greatly increase their net profit per ton in the second half of 2016. most enterprises have issued earnings forecasts. Since the end of November, the price of cardboard has increased by 26 %, corrugated paper by 39 % and white cardboard by 16 %. In addition, the price of coal began to fall after reaching a high level in mid - November, which also contributed to the increase of profit margin.

The stock price also gave a positive response to this month's profit surprise. However, we suggest that investors remain cautious and switch to the off-season mode, because the profit margin may decline in the first half of 2017 and the risk of triggering another expansion of production capacity has already been revealed. The periodicity of the paper industry may not be easy to change, even if the capital market trades, just as the valuation multiples will hover around the benchmark price-to-book ratio based on the prospect of price and profit margin during the peak season and the off season. Therefore, the possible overcapacity may threaten the revaluation opportunities of the paper industry.

Reason

Gross profit per ton began to decline in January. the over-expected increase in gross profit since the end of November last year was mainly due to the delay in cost increases caused by low-priced domestic waste paper ( one month ) and overseas waste paper ( two months ) inventories of paper enterprises. At the same time, we have also noticed that some paper factories that have already stopped production use hoarding to resell paper products during the peak season, thus contributing to the increase in paper prices.

Industry data show that domestic waste paper prices rose 19 % in December last year and fell 3 % in January. From November to December last year, the price of imported waste paper increased by 8 % ( us dollars ), further increased by 4 % in January, while the price of paper remained stable in January. This shows that the declining trend of gross profit per ton in the first four weeks of this year has already appeared, because the rising price of waste paper has increased the accounting cost of paper mills while the price of paper remains stable.
Paper mills are encouraged by high profit margins to expand their production. According to our preliminary statistics, an additional 3.3 million tons of cardboard production capacity will be added in 2016. According to the capacity plan announced by the papermaking enterprises, the new capacity will be expanded to 5.1 million tons in 2017 and 11 million tons in 2018 and 2019.

The trading multiples of paper companies' stock prices hovered around the average value of the historical market value ratio, slightly exceeding the average value during the peak season in the second half of the year and falling back during the low season in the first half of the year. Based on our adjusted earnings forecast, the current stock prices of nine dragons paper and liwen paper respectively correspond to 1.3 times and 1.5 times of the current year's book value ratio ( the average value of the historical book value ratio is 1.2 times and 1.5 times respectively ), indicating that the recent valuation has been relatively high. Maintaining the recommendation, based on the stable growth prospect that the two companies can still expect and the dividend yield of about 3 %, even though there is a downward trend in earnings per ton and the risk of overcapacity increases during the off-season period, it will mean that the market will remain cautious about further pushing up the stock prices of the two companies in the near future.