---
title: "C&S Paper: Beset by External Challenges and Internal Woes"
description: "C&S Paper, once dubbed the 'paper Mao Tai', has seen its stock price halve since June 2021, following a series of internal issues including executive departures and a terminated employee stock ownership plan. The company's performance has also deteriorated, with a significant drop in net profit in the first three quarters of 2021 due to rising raw material costs and intensified competition."
author: "主木"
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published: "2022-01-04"
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# C&S Paper: Beset by External Challenges and Internal Woes

> C&S Paper, once dubbed the 'paper Mao Tai', has seen its stock price halve since June 2021, following a series of internal issues including executive departures and a terminated employee stock ownership plan. The company's performance has also deteriorated, with a significant drop in net profit in the first three quarters of 2021 due to rising raw material costs and intensified competition.

Source: Financial New Knowledge (ID: caijingxinzhi)
Besides selling paper, what else can it do?
In early December, C&S Paper, dubbed the 'paper Mao Tai', received a inquiry letter from the Shenzhen Stock Exchange, facing six consecutive questions. The exchange inquired about the true intention behind the company's employee stock ownership plan, the reasons for terminating it, and the resignation of several senior executives this year.
**As a result, many investors worried that C&S Paper's stock price, which had already nearly halved, would experience another 'avalanche'.**
It is reported that from June 1, 2021 to December 1, C&S Paper's stock price fell from around 34 yuan to around 17 yuan, a drop of 50%. Fortunately, this incident did not seem to have a significant impact on C&S Paper; on the next trading day after receiving the inquiry letter, the stock price only fell 3.63% to close at 16.21 yuan per share.
**In fact, C&S Paper is currently in a stage of internal and external troubles.**
Before launching the 'bottom-fishing' share increase initiative this year, its actual controller Deng Yingzhong 'retired' and resigned as chairman of C&S Paper. In addition, six directors, supervisors, and senior managers left the company consecutively this year, causing frequent personnel changes internally. In terms of business, C&S Paper's net profit in the first three quarters of this year declined significantly, industry competition intensified, and the results of horizontal expansion remain unknown.
What exactly caused the former 'paper Mao Tai' to fall to this state? Where will C&S Paper head in the future?
******Managing Market Value: 'Reaping Leeks'**
On May 10 this year, C&S Paper's director and actual controller Deng Yingzhong issued a 'bottom-fishing share increase initiative'. In the announcement, Deng Yingzhong called on all employees of the company and its subordinate holding companies to actively buy the company's stock, and promised to fully compensate employees who held shares continuously until May 30, 2022 and were still employed, if they incurred losses from buying company stock between May 10 and May 31, 2021. If there were gains, they would all belong to the employees personally.
Just over ten days after the bottom-fishing initiative was issued, C&S Paper held board and shareholder meetings on May 21 and June 7 respectively, approving the 'Third Employee Stock Ownership Plan (Draft) and Its Summary' and related proposals. The holders of the employee stock ownership plan were the company's directors, senior managers, and core backbone personnel, totaling no more than 200 people, with a total fund limit of 200 million yuan.
**Having someone 'cover losses' can be said to be a great blessing, and coupled with the company's call for employees to make internal purchases, it can also be seen, in a sense, as the company's management having high confidence in the company's stock price and performance.**
Not only that, at the time, many institutions' research reports were also extremely bullish on C&S Paper's stock price. Among them, Tianfeng Securities predicted C&S Paper's net profit attributable to the parent for 21/22 to be 1.30 billion and 1.76 billion yuan respectively; Soochow Securities estimated C&S Paper's net profit for 2021-2023 to be 1.35 billion, 1.78 billion, and 2.13 billion yuan, with corresponding PEs of 32.2, 24.5, and 20.5, giving a 'Buy' rating.
**And if we return to performance itself, the 2020 annual report showed that the company's net profit growth rate reached 50%, and from 2018 to 2020, the net profit growth rate had been gradually increasing for three consecutive years.**
At that time, market investors began to chase C&S Paper's stock. When the relevant plan was launched, C&S Paper's stock price once rose to around 35 yuan per share, **but since mid-June, its stock price turned and entered a continuous plunge, now having halved.**
According to C&S Paper, the company's employees' stock purchases were backed by the company, but external investors who followed the trend and joined could only swallow their anger in the face of the halved stock price.
However, it is worth noting that shortly after the 'bottom-fishing share increase initiative' was released, C&S Paper repeatedly issued public announcements stating, 'As of the disclosure date of this announcement, the company's third employee stock ownership plan has not yet begun to purchase company stock.'
Then on November 30 this year, C&S Paper suddenly announced that it would terminate the employee stock ownership plan. In this regard, C&S Paper explained, 'Given that relevant financing policies have changed and market reasons, it is difficult to continue promoting the employee stock ownership plan.'
**In other words, the employee stock ownership plan at that time was always just a plan and was never actually implemented.**
**In addition, C&S Paper's senior executives have also changed frequently this year.** From March to October this year, six senior executives resigned consecutively. These include Li Youquan, a supervisor who was among the first to respond to the share increase initiative; Zhou Qichao, the board secretary and vice president who had just signed a commitment not to reduce holdings; and Ye Longfang, a vice president who promised not to reduce holdings.
C&S Paper has therefore been questioned for 'reaping leeks'.
The decision to terminate the plan is likely related to its actual controller Deng Yingzhong, because he cares very much about the company's market value performance. In the past, whenever the stock price fluctuated, he would buy back shares to maintain the stock price. This year alone, the company has spent over 600 million yuan to buy back shares, and it is worth noting that the company's net profit last year was only 905 million yuan.
Employee stock ownership should not be used as a means to boost stock market confidence, nor is it suitable for major shareholders or executives to propose. If major shareholders and executives can fulfill their duties and achieve good performance, the market will certainly give a reasonable valuation.
******Where is the Performance Turning Point?**
Of course, the most direct reason for the stock price change is the pressure on performance.
Data shows that in recent years, C&S Paper's revenue and net profit attributable to the parent have been growing steadily, and the growth rate of net profit attributable to the parent has generally been significantly higher than the revenue growth rate.
**Such excellent performance continued until the first quarter of 2021, but starting from the second quarter of this year, C&S Paper's performance experienced a clear 'stall'.**
According to C&S Paper's financial reports, in the first three quarters of 2021, C&S Paper saw its first decline in same-period profit data since 2015, with net profit falling back to the level of the same period in 2019. In the first three quarters of 2021, the company achieved revenue of 6.275 billion yuan, a year-on-year increase of 12.95%, and net profit attributable to the parent of 484 million yuan, a year-on-year decrease of 27.88%. Among them, in the third quarter of 2021, revenue was 2.027 billion yuan, a year-on-year increase of 4.5%, and net profit attributable to the parent was 77 million yuan, a year-on-year decrease of 64.7%. In contrast, in 2020, despite the severe pandemic, C&S Paper still achieved revenue of 7.85 billion yuan and net profit of 905 million yuan.
As for the reasons for the decline in performance in the first three quarters of this year, the company stated in its announcement: 'Due to rising raw material prices, intensified industry competition leading to increased selling expenses, and other factors.'
The third-quarter report shows that C&S Paper's total operating costs were 5.729 billion yuan, a year-on-year increase of 20.48%. Previously, C&S Paper also stated on relevant platforms that paper pulp is the main raw material for production, accounting for about 40%-60% of production costs. Fluctuations in pulp prices will significantly affect the company's costs, thereby causing profit fluctuations.
**Also noteworthy is the company's gross margin.**
In 2020, C&S Paper launched masks, disinfectant wipes, disinfectant hand sanitizers, and other products in response to the pandemic, driving gross profit growth, with the company's gross margin reaching 41.32%. However, as pandemic prevention and control improved, the mask dividend gradually disappeared, the company's product mix returned to its original structure, and gross profit growth points diminished. In the first half of 2021, the gross margin fell to 39.68%, and in the first three quarters, it was 37.95%.
Paper products are constrained by upstream raw material prices, making it difficult to further compress costs, resulting in generally low gross margins across the industry. This year, pulp prices have continued to rise. Although C&S Paper's inventory has alleviated the pressure of raw material price increases, inventory is ultimately limited, and its future performance remains to be seen.
******Although C&S Paper is currently in the first tier of the industry, in terms of both production capacity and revenue scale, it is still at the bottom of the first tier.**
Data from Qianzhan Industry Research Institute shows that in 2020, Hengan International's total production capacity was 1.42 million tons, Vinda International's total production capacity was 1.25 million tons, while C&S Paper's was only 840,000 tons.
In terms of revenue scale, in 2020 and the first half of 2021, Hengan International's tissue business revenue was 10.383 billion yuan and 4.697 billion yuan respectively; C&S Paper's was 7.5 billion yuan and 4.083 billion yuan respectively.
In addition, C&S Paper's revenue is heavily dependent on the tissue business, which also makes the market worry that it will eventually face a development ceiling.
**Although tissue is a daily necessity, the industry has low entry barriers, fierce competition, and strong substitutability of product brands.** The four first-tier companies in the industry—Hengan International, C&S Paper, Vinda International, and Gold Hongye—together account for less than 30% of the domestic household paper market share.
The industry is large, companies are small, and market share is fragmented, which is a characteristic of the essential consumer market. C&S Paper, whether in terms of brand or channels, finds it difficult to form an effective moat.
**The household paper industry is also a relatively 'narrow' track, and the market's imagination space is not too large.** Peers such as Hengan International and Vinda International are not limited to the household paper category. In addition to well-known household paper brands like 'Xinxiangyin' and 'Pinno', Hengan International also has sanitary napkin products including 'Space 7', 'Anerle', and 'Anle'. Vinda International is also making efforts in both female care products and adult incontinence care products.
Although since 2018, C&S Paper has horizontally expanded into female products such as cotton soft towels and Dolemi; at the same time, it launched the 'Sun' brand as a bamboo pulp series household paper brand, aiming to capture the mid-to-low-end household paper market with high cost performance, developing dual brands with 'C&S'. During the pandemic, C&S also launched new products such as masks, alcohol disinfectant wipes, disinfectant hand sanitizers, and mouthwash.
**But as of now, household paper still accounts for over 95% of the company's revenue.**
In this track, the top three companies—Hengan International, Unicharm, and Jingxing—already have a combined market share of over 50%, and the top ten brands account for 82% of sales, indicating that the market is basically mature. In contrast, C&S Paper's new business area, 'personal care', had revenue of 67 million yuan in the first half of 2020, accounting for 2% of total revenue; in the first half of 2021, this part's revenue had fallen to 40.2958 million yuan, with the proportion dropping to 0.95%. **In a highly concentrated industry, it is not easy for C&S Paper to get a share.**
In short, for C&S Paper now, it is still in an adjustment phase. After industry demand and cost side gradually recover and the new management team matures, there may be a return to value. But in the long run, to prove its value, it needs to tell more new stories on the product side.
**Are you 'watching' me?**


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