中国造纸业瑞银华宝（英文版）

ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURESBEGINONPAGE411UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.abUBSInvestmentResearchChina’sPaperSectorAdefensivecommodity!AdefensivebasicmaterialWebelieveChina’spapermanufacturerswilllikelybelessimpactedbyanyslowdowninChina’seconomythanmostbasicmaterialcompanies.Thisisbecausethemainconsumersofpaperareinthepackagingandpublishingindustries,whicharerelativelyinsulatedtoatighteningofmonetarypolicycomparedwithcommoditiesexposedtofixedassetinvestmentorconstruction.!StructuralstrengthsInaddition,theindustryhasanumberofstructuralstrengths.First,paperconsumptionpercapitainChinaisfarfromsaturationlevels,atonlytwo-thirdsoftheworldaverageandone-tenthoftheUSlevel.Second,whilestillfragmented,significantconsolidationoftheindustrysince1998hasledtoatrendofreturns.Third,importsstillaccountfor12.9%oftotalconsumption,providingscopeforsubstitutionbydomesticproduction.!Wepreferproducersofhigh-endpaperWepreferproducersofhigh-endpaperwhereimportsubstitutionhasthemostscope(weestimatemorethan30%ofhigh-endpaperisstillimported)andwhereproducerconcentrationishighest(thetoptwoplayerscontrolinexcessof70%ofhigh-endproduction).ForthesereasonsourtoppickinthesectorisShandongChenmingPaper,whichwerateBuy2withapricetargetofRmb14.80.WerateShandongHuataiPaperNeutral2withapricetargetofRmb11.60asitsmainfocusisinthenewsprintmarketwheredomesticoversupplyexists.Weinitiatedcoverageofthesetwopapercompanieson20May.24May2004www.ubs.com/[e-mail][phone]-55568819GlobalEquityResearchChinaPaperProductsSectorCommentChina’sPaperSector24May2004TheAsharesdiscussedinthisreportarelistedeitherontheShanghaiorShenzhenexchange.UBSisanapprovedQualifiedForeignInstitutionalInvestor(QFII)facility,andisabletofacilitatetradinginthesesharesbyforeigninvestors.FormoreinformationabouttheQFIIschemeandtheservicesUBSprovidestofacilitateaccesstotheA-sharemarket,pleasecontactNicoleYuenon+85229718912.UBS2ContentspageSummaryandinvestmentcase3Whywefindthepapermarketattractive3Thepaperindustry4Risks10Productanalysis:Wepreferhigh-endpaper16ChenmingPaperisourtoppick20Companyreports21—ShandongChenmingPaperHoldings............................................................................22—ShandongHuataiPaperCo............................................[e-mail][phone]-55568819China’sPaperSector24May2004UBS3SummaryandinvestmentcaseWhywefindthepapermarketattractiveChina’spaperconsumptionincreasedataCAGRof9.3%in1980-02,inlinewithitsGDPgrowthrate.Productionalsoincreasedatthesamepaceduringthisperiod.Totalpaperconsumptionreached41.2mtonnesin2003.About10%oftotalconsumptionwassatisfiedbynetimports.Inourview,thepapersectorinChinaisattractivebecause:!2001-06isanupsidecycleforpaperpricesanddemandinChina.!Import-substitutedemandinthehigh-endsegmentshouldbeanewprofitdriverinthiscycle.!Theconsolidationsince1998hasnotonlyenhancedthesizeandcompetitivenessoflargeenterprises,butalsoimprovedtheprofitabilityoftheindustry.!China’smarketisfarfromsaturation,withpaperconsumptionpercapitaonlytwo-thirdsoftheworldaverage,one-eighthofJapanandone-tenthoftheUS.However,webelievedownsidecouldcomefromthefollowing:!Heavyrelianceontheimportofrawmaterials,includingpulpandwastepaper.Increasinginternationalpulppriceshavenotonlysqueezedthemarginsoflocalcompanies,butalsoincreasedthevolatilityoftheirearnings.!Since1January2004,theexportVATrefundofthepaperindustryhasbeencuttozeroformostproducts,whichislikelytohurtpaperexportsandincreasethelocalsupply.Weexpectcompetitioncouldbecomefierceinthepapermarket.AmongthewiderangeofpaperproductsproducedinChina,printingandwritingpaperandpaperboardarethelargesttwointermsofproductionvolume.Paperboard,coatedpaperandnewsprintrankedinthetopthreeintermsofconsumptiongrowthrate.However,coatedpaper,ahigh-endproduct,hasthehighestrelianceonimports,indicatingthiscategoryhasthestrongestupsidepotentialfordomesticproducers.Thecoatedpapermarketislessfragmentedthanothersegments.About80%ofcoatedpaperisartpaper(copperplatepaper).Lightweightcoatedpaper(LWC)isafast-growingnewproduct.LWCischeaperthanartpaper,soitisregardedasagoodlow-endsubstituteforartpaper.Listedpapercompaniesmainlyfocusonnewsprint,coatedpaperandspecialtypapers(suchascigarettepackaging).AsteadilyexpandingindustryReasonsweliketheChinapaperindustrySomepotentialdownsidefactorsCoatedpaperoffersgreatestupsidepotentialArtpaperisamatureproduct,andLWCisafast-growingnewproductChina’sPaperSector24May2004UBS4China’spapersectorhasexperiencedconsolidationinthepastfiveyears,duringwhichtimeShandongChenmingPaper(ChenmingPaper)hastakentheopportunitytoexpandquicklythroughacquisition.ChenmingPaper’sproductiongrewfrom240Ktonnesin1998to1.39mtonnesin2003,withaCAGRof43%.IthasbecomethesecondlargestpapermakerinChina.