I. Industry Continues to Develop, Overall Operation Good, Accelerating Towards High-End

1. Tissue paper remains the fastest-growing paper grade in the entire paper industry According to the report on China's paper industry production and sales situation from January to September 2016 released by the China Paper Association, tissue paper production and sales volume remained the fastest-growing among major paper grades such as cultural paper, packaging paper, and paperboard.

2. China is the market with the highest tissue paper growth rate among major global regions Data from RISI Consulting on the global tissue paper industry shows that from 2011 to 2015, the annual growth rate of global tissue paper consumption did not exceed 4%. In contrast, China's tissue paper consumption growth rate did not fall below 6.6% annually.

3. Leading companies continue to expand production (1) Hengan Wuhu production base: In August 2016, the second phase project introduced a 60,000 tons/year paper machine from Valmet, bringing Hengan Group's total tissue paper production capacity to 1.08 million tons/year. At the end of 2016, Hengan ordered two tissue paper machines from Italy's Toscotec, planned for installation at its Xinjiang Changji plant, with startup scheduled within 2017.

(2) Vinda signed a contract with Italy's Toscotec in early 2016 for three tissue paper machines, two of which were installed at Guangdong Sanjiang Paper Mill (model: Ahead 2.0M) and one at Shandong Laiwu Plant (model: Ahead 1.5M). In August 2016, the Sanjiang paper mill's machine started production, bringing the Sanjiang production base's capacity to 260,000 tons/year, making it Vinda Group's largest production base.

(3) Gold Hong Ye's Sichuan Ya'an production base is accelerating construction, with plans to start production in July 2017. The project is built in two phases with a total tissue paper capacity of 120,000 tons/year. Gold Hong Ye's Suining production base completed equipment commissioning by August 2016.

(4) C&S Paper announced on November 15, 2016, that its Tangshan branch planned to expand a 75,000 tons/year high-grade tissue paper project to meet sales growth demand in North and Northeast China. The total investment is approximately 409 million yuan, with a construction period of less than three years. On January 3, 2017, the company announced that its controlling subsidiary C&S Paper (Hubei) Co., Ltd. planned to build a new 200,000 tons/year high-grade tissue paper project with a total investment of about 1.2 billion yuan. The project will be implemented in phases, with the first phase investing about 600 million yuan to produce approximately 100,000 tons/year of high-grade tissue paper to meet sales growth demand in Central China.

(5) Lee & Man Group: In the second half of 2015 and the first quarter of 2016, signed contracts with Valmet for a total of four 60,000 tons/year tissue paper machines, installed at the Chongqing production base, with plans to start production by the end of 2016, bringing the Chongqing base's capacity to 355,000 tons/year. For the Jiangxi Jiujiang production base, in June 2016, signed contracts with Voith for two 60,000 tons/year tissue paper machines, planned to start in March and May 2017, with a wire width of 5600mm and design speed of 2200m/min. For the Guangdong Dongguan production base, two Voith tissue paper machines have been ordered, planned to start in July and September 2017. Lee & Man Group also signed contracts with Italy's A.Celli for four AC882 type tissue rewinding machines with a width of 5620mm, two installed at Jiangxi Jiujiang and two at Guangdong Dongguan, with delivery planned by the end of 2016. After these projects are fully operational, Lee & Man's total tissue paper capacity will reach 575,000 tons/year.

4. Listed companies performed well in the first three quarters (1) Vinda Paper: In the first three quarters of 2016, achieved operating revenue of HK$8.688 billion, a year-on-year increase of 21.4%; gross profit of HK$2.726 billion, up 22.1% year-on-year. (2) C&S Paper: In the first three quarters of 2016, achieved operating revenue of 2.741 billion yuan, a year-on-year increase of 32.58%; net profit of 181 million yuan, up 173.90% year-on-year.

5. Small and medium-sized enterprises significantly upgrade equipment, accelerating the industry's shift towards high-end In 2016, newly signed or commissioned tissue paper machines were mainly modern crescent former or vacuum cylinder former machines. Leading enterprises' new projects mainly used imported machines, while most small and medium-sized enterprises' new projects used domestic machines. Enterprises in the Baoding, North China tissue paper base accelerated equipment updates, phasing out more energy-intensive, inefficient old machines as new ones were commissioned.

(1) Imported tissue paper machines signed in 2016:

  • Hengan: Signed for 2 tissue paper machines with Italy's Toscotec;
  • Vinda: Signed for 3 machines with Italy's Toscotec;
  • Weierfu: Signed for 2 machines (BF-W10S) with Japan's Kawanoe, each with a capacity of 12,000 tons/year;
  • Lee & Man: Signed contracts with Valmet for 4 machines of 60,000 tons/year each in the second half of 2015 and first quarter of 2016; in June 2016, signed with Voith for 4 machines of 60,000 tons/year each;
  • Baoding Gangxing: Signed for 1 machine (BF-1000S) with Japan's Kawanoe;
  • Hebei Jinboshi: Signed for 2 machines (EcoEc2850/1200) with Poland's PMP;
  • Guizhou Chitianhua: Signed for 2 machines of 60,000 tons/year each with Andritz.

(2) Approximately 30 domestic tissue paper machines were signed in 2016, with equipment providers mainly including Shandong Weifang Kaixin, Shandong Xinhe, Foshan Baotuo, Shanghai Qingliang, Guizhou Hengruichen, etc. Among them, 15 sets were concentrated in Baoding, Hebei tissue paper enterprises.

II. Relative Overcapacity, Declining Capacity Growth Rate, More Rational Investment

1. Relative overcapacity The tissue paper industry is still in a stage of relative overcapacity, with the average operating rate for the whole industry expected to be below 80% in 2016. This is reflected in: (1) Average product price: The average price for the year is expected to be flat or slightly lower than the previous year, reflecting intense market competition. Specifically:

  • Retail prices were flat year-on-year;
  • Listed companies' semi-annual reports showed that sales volume growth was higher than sales revenue growth;
  • Data showed that in the first half of the year, the price of tissue paper base paper in Hebei, Shandong and other provinces fell by 200 yuan/ton. (2) Some projects announced in 2015 were still delayed in commissioning.

2. More rational investment (1) In 2016, signed and commissioned projects were mainly expansions or new bases by existing tissue paper enterprises; (2) Few new enterprises announced entry into the tissue paper industry. The following projects' progress needs attention and verification:

  • Jiangxi Huawang Paper Industry Co., Ltd. announced in September 2016 the start of a 100,000 tons/year tissue paper project;
  • Sichuan Jintian Paper is building a 100,000 tons/year tissue paper project;
  • Sichuan Qianwei County announced the construction of a 420,000 tons/year bamboo pulp tissue paper industrial base. (3) APP's expansion in tissue paper is gradually shifting to Indonesia. In 2016, APP's tissue paper capacity in Indonesia reached 1.064 million tons/year, and in mainland China reached 1.64 million tons/year, ranking third globally in total capacity.

III. From Q4, Major Raw Material Wood Pulp Prices Rose, Increasing Operating Pressure From September 21, 2016, the new overload and over-limit regulations were implemented, leading to higher logistics costs. From Q4, due to RMB depreciation against the US dollar, imported pulp costs rose, and commodity pulp prices generally increased, putting greater pressure on tissue paper producers. From the retail market perspective, raw material price increases have not yet passed through to the terminal retail market.

IV. Product Innovation More Focused on Consumer Market Papermaking is a traditional industry. As a branch of papermaking, tissue paper production technology is relatively mature. Enterprises' new product development is more focused on the consumer market, catering to consumer needs. (1) Launching new products with "differentiated product specifications and packaging design"; (2) Developing new products to capture consumers' concerns about health and natural environmental protection:

  • Guangdong Bilun's "tissue paper with added cotton linter fiber";
  • In 2016, the rapid increase in natural-colored tissue paper. Besides wheat straw pulp, bamboo pulp, and bagasse pulp natural-colored tissue paper, some enterprises have begun producing wood pulp natural-colored tissue paper, including Shandong Dongshun, Yunnan Yunjing, etc. (3) Conceptual products:
  • Chenming Group's dry-wet dual-use paper and quick-dissolving toilet paper;
  • Vinda Group's ultra-tough facial tissue and 4D-Deco embossed toilet paper.

V. Rapid Growth of E-commerce Channel Share Currently, tissue paper marketing still relies mainly on traditional distributors and modern supermarkets as primary channels, with e-commerce accounting for a relatively small share overall. However, the e-commerce channel share is growing rapidly—as evident from listed companies' annual reports, Vinda's e-commerce share was 9.8% in the first half of 2015 and 17% in the first half of 2016.

VI. Export Situation Not Optimistic In 2016, tissue paper exports continued the decline seen in 2015. In the first three quarters, total tissue paper exports were 525,000 tons, down 1.64% year-on-year; average price was $2,248/ton, down 17.82% year-on-year. Exports were still mainly finished products, accounting for 74.8% of total exports. The decline in both volume and price of tissue paper exports reflects more intense competition in international markets, and the situation remains severe.

VII. Improvement in Domestic Equipment Level

  1. Tissue paper machines:
  • In 2016, domestic tissue paper machine manufacturers announced the latest design speed of 1400 m/min;
  • Steel Yankee dryers and surface spraying achieved localization;
  • Development of constant-pressure alloy creping blades.
  1. Converting equipment:
  • Large circular knives for cutters now have German manufacturing technology (Songlin Scraper Saw Company acquired a German company);
  • Upgrading of toilet roll machines to improve efficiency.

VIII. Promotion and Application of Foreign New Technologies and Equipment in China Tissue paper production equipment and technology are relatively mature. Development of new technologies and equipment mainly focuses on improving energy efficiency and reducing energy consumption per unit product. In 2016, foreign new technologies and equipment promoted and applied in China include:

  • Italy's Toscotec's short-loop approach system (TT SAF) and heat recovery system for Yankee dryer hoods;
  • Italy's Gacon's independent shoe press: Ordinary shoe presses press against the Yankee cylinder surface, easily causing deformation of the Yankee shell, affecting overall machine performance. The shoe press as an independent unit avoids these problems and achieves better sheet bulk and higher sheet dryness;
  • Valmet's Advantage ReDry technology: Recovers and reuses hot exhaust gas from the Yankee dryer, effectively reducing energy consumption per unit product;
  • Finland's Kemira's tissue structure analyzer: Measures the crepe structure and the number of free fiber ends on the paper surface, enabling microscopic analysis of product performance, thereby optimizing production processes to improve production efficiency and product quality, achieving more refined management of production and process technology.

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