Paper industry research report: demand recovery guides cycle deduction, the layout is at the right time

The inventory cycle is divided into four stages: (1) active replenishment: the demand recovers and the inventory turnover accelerates, the enterprise actively increases the inventory, the growth rate of operating revenue and inventory increases, and the profit of paper enterprises increases first, and then changes with the fluctuation of the prices of raw materials and finished products; (2) Passive replenishment: industrial demand falls back, the adjustment of enterprise production behavior lags behind, the growth rate of income falls back, the inventory is still rising, but will come to the end of the inventory upward stage; (3) Active destocking: with the decline of external demand, the inventory turnover rate decreases, enterprises reduce production and take the initiative to reduce the inventory level, and the inventory growth rate and income growth fall back; (4) Passive destocking: external demand has bottomed out, but enterprises still maintain a low level of production, and inventory is accelerated. Corporate revenue growth stabilized and rebounded, and inventory growth declined, which is the end of inventory decline. 
Looking back, the paper industry has experienced five complete inventory cycles since 2006: February 2006 to November 2008: (1) inventory cycle: The current inventory cycle lasts for 33 months, including active inventory removal from February 2006 to December 2006, passive inventory removal from December 2006 to August 2007, active inventory replenishment from August 2007 to February 2008, passive inventory replenishment from February 2008 to November 2008. Inventory removal lasted for 18 months and inventory replenishment lasted for 15 months. (2) Papermaking PPI: the current round of papermaking PPI started from December 2006, the boom peak appeared in August 2008, and the inflection point of papermaking PPI appeared in the transformation stage from active destocking to passive destocking; (3) Stock price: Since the Shenwan Paper Index started in March 2006, the stock price rise was 9 months ahead of the paper PPI inflection point, and the highest point appeared in September 2007, with an increase of 353% within the range; (4) Increase of individual stocks: Nine Dragons Paper rose the most. The excess return of Nine Dragons Paper compared with Hang Seng Index was 165%, while the excess return of Bo Hui, Chenming and Sun compared with CSI 300 was 108%, 78% and 45%. This round of paper plate boom upward driving factors for the main macroeconomic upside. In this stage, China's GDP grew at 7%-15% quarterly year-on-year with an average of 12%. The economy maintained rapid development, driving the vigorous growth of supply and demand of the midstream manufacturing industry. Even though the global financial crisis in 2008 had a negative impact on the industry, the total consumption of China's paper industry grew at more than 8% year-on-year and the operating revenue grew at more than 20% year-on-year. 
November 2008 to December 2011: (1) Inventory cycle: The current inventory cycle lasts for 37 months, among which the active replenishment period is from November 2008 to February 2009, the passive replenishment period is from February 2009 to November 2009, the active replenishment period is from November 2009 to February 2010, and the passive replenishment period is from February 2010 to December 2011. The duration of destocking was 12 months, and the duration of replenishing was 25 months. (2) Paper PPI: this round of paper PPI from July 2009 (5 months ahead of the warehousing - replenishment inflection point) along the way to the highest point in June 2010, paper PPI inflection point appeared in the passive warehousing stage; (3) Stock price: The upward cycle of Shenwan Paper Index started in November 2008, and the inflection point of stock price was 8 months ahead of the inflection point of paper PPI. The peak of stock price appeared in April 2011, with an increase of 142% within the range. (4) Increase of individual stocks: Nine Dragons Paper rose the most, with an excess return of 425% relative to Hang Seng Index, followed by an excess return of 117% relative to Weda and 33% relative to CSI 300 (occurred in the active replenishment stage). After the financial crisis in 2008, the global liquidity was loose, and China implemented the "4 trillion" economic stimulus policy to drive the demand. The domestic economy grew strongly, the demand of the paper industry was strong, and the price of finished paper rose significantly. In this stage, the domestic GDP grew at 6%-12% quarterly year-on-year, with an average of 10%, and the total production volume of China's paper industry grew at 7%-8% year-on-year. 
December 2011 to February 2015: (1) Inventory cycle: The current inventory cycle lasts for 38 months, including active inventory removal from December 2011 to October 2012, passive inventory removal from October 2012 to October 2013, active inventory replenishment from October 2013 to December 2013, passive inventory replenishment from December 2013 to February 2015, which lasts for 22 months. Replenishment lasts for 16 months; (2) Paper PPI: this round of paper PPI basically did not rise, mainly due to overcapacity on the formation of certain constraints on the price. (3) Stock price: the lowest point of Shenwan Paper Index was in November 2012, and the highest point was in February 2015, with a maximum increase of 79%; (4) Individual stock increase: the stock price of leading paper enterprises rose relatively weak. The excess return of Nine Dragons Paper Industry was 33% compared with Hang Seng Index, and the excess return of Mountain Eagle and Sun was 28% and 19% compared with CSI 300. This round of inventory recovery cycle and paper PPI business cycle showed obvious divergence. After the strong stimulus of the main "four trillion yuan" policy, the paper industry expanded rapidly, extensive overcapacity, resulting in upward inventory accumulation, but during this period, paper PPI basically remained flat. The recovery rhythm of this round of inventory cycle was different from that of paper price recovery. 
February 2015 to September 2018: (1) Inventory cycle: This inventory cycle lasts for 43 months, among which active inventory removal is from February 2015 to December 2015, passive inventory removal is from December 2015 to November 2016, active inventory replenishment is from November 2016 to October 2017, passive inventory replenishment is from October 2017 to September 2018, and inventory removal lasts 21 months. Replenishment lasts for 22 months; (2) Paper PPI: in this round, the paper PPI was basically flat from February 2015 to September 2016, and from October 2016 (3 months ahead of the turning point of store-replenishment) to October 2017; (3) Stock price: The upward cycle of Shenwan Paper Index started in February 2016, and the rise of stock price was 8 months ahead of the inflection point of paper PPI. The highest point appeared in September 2017, with an increase of 64% within the range; (4) Increase of individual stocks: Nine Dragons Paper Industry gained the most. The excess return of Nine Dragons against Hang Seng Index was 125%, and the excess return of Jierou, Bohui and Sun against CSI 300 was 111%, 88% and 34%. In this inventory cycle, the real estate policy and loose monetary policy have boosted the domestic economic growth, driving the demand of the paper industry and other midstream industrial manufacturing industry. In this stage, the pressure of national environmental protection is increased, the supply-side reform of paper industry, a large number of small and medium capacity of paper mills are cleared, the industrial inventory reaches the low level and enters the active replenishment stage, the paper price enters the upward channel, and the leading market share increases. 
September 2018 to February 2022: (1) Inventory cycle: The current inventory cycle lasts for 41 months, among which active inventory removal takes place from September 2018 to April 2019, passive inventory removal takes place from April 2019 to November 2019, active inventory replenishment takes place from November 2019 to February 2021, passive inventory replenishment takes place from February 2021 to February 2022, and inventory removal lasts for 14 months. Replenishment lasts for 27 months; (2) Paper PPI: The upturning point of this round of paper PPI was in September 2019, 2 months ahead of the store-replenishment turning point, and it was in the passive store-destocking stage, and the paper PPI progressed to June 2021. (3) Stock price: The upward cycle of Shenwan Paper index started in January 2019, 8 months ahead of the turning point of paper PPI, and the highest point appeared in May 2021, with an increase of 86% within the range; (4) Individual stock increase: Bohui Paper industry gained the most in this round. The relative income of Bohui Paper industry relative to CSI 300 was 224%, mainly due to APP's investment in Bohui, reshaping the pattern of white card industry. Nine Dragons Paper Industry increased by 80% relative to Hang Seng Index, and Sun increased by 58% relative to CSI 300. After the outbreak of the epidemic at the end of 2019, China's industrial production took the lead in the recovery in the second quarter of 2020, taking on more demand in the global supply chain. Combined with the loose liquidity of major economies in the world, the domestic paper PPI economy increased from the second half of 2019 to the first half of 2021. 
Conclusion: The inventory cycle is highly correlated with the economic cycle. This round is about to enter the passive destocking stage and the layout stage. (1) Layout time: In retrospect, the inflection point of paper PPI leads the replenishment cycle for more than one quarter, and the bulk paper stock price usually leads the paper PPI up for more than one quarter. In this cycle, we judge that the industry has been in the stage of active destocking since February, 22. Considering the profit improvement of paper enterprises and the quarter-on-quarter recovery of economy, it is expected to transform from active destocking to passive destocking in the second half of 23. Considering that the stock price reflects the paper PPI one quarter in advance, the bulk paper distribution is at that time. (2) Cyclical elasticity: demand determines the cyclical changes of inventory, and supply determines the range of price changes. Each round of demand change is the most critical factor to guide the direction of inventory cycle, thus driving up the PPI economy of paper industry. However, based on the analysis of this round of supply pattern, the performance of subdivided paper species is relatively weak balance. 
The turning point of the inventory cycle is linked to marginal changes in earnings. (1) Pulp system: broadleaf pulp has maintained a stepped downward trend since the marginal weakening at the end of 22. Although there are short-term disturbances such as the Chilean fire and the recent strike in Finland, it is expected that the new production capacity of Arauco and UPM supply end will be released clearly, and it is expected that broadleaf pulp will continue to decline in 23Q2. The price of subdivided paper such as culture paper, thermal transfer printing and Glasin has been mildly raised in Q1, and some of them have been landed. Considering the pulp inventory for 2-3 months, it is expected that the profit of pulp base paper such as special paper and culture paper will be significantly improved in Q2 ton. (2) Waste paper: in terms of box board corrugated paper, the decline of national waste and waste paper is mainly, the decline of cost is greater than the decline of paper price, leading joint price reduction to cope with the impact of imported paper, Nine Dragons, Mountain Eagle 23Q2 profit per ton is also expected to improve. Considering the profit Q2 marginal expansion of paper enterprises, the active warehouse phase is coming to an end, superimposed on the recovery of the second half of the peak season to pull the industry into the passive warehouse, the current bulk paper leading has ushered in the layout of the time, the left is recommended to start the layout. 
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