The 10 Billion Project Is Urgently Stopped! Chenming Paper Broke Its Wrist And Contracted, Betting Against The Trend On The Breakthrough Of High-end Paper

The 10 billion project is urgently stopped! Chenming Paper broke its wrist and contracted, betting against the trend on the breakthrough of high-end paper

On April 25, Chenming Paper (01812. HK) issued an announcement officially announcing the termination of the construction of the second phase of the Huanggang Chenming project. The project was originally approved by the board of directors and the general meeting of shareholders in August 2020, with a planned total investment of 12.8 billion yuan, and plans to build 4 paper production lines with an annual output of 1.5 million tons (covering cultural paper, white cardboard and other varieties), supporting mechanical pulp production lines with an annual output of 520,000 tons, sewage treatment, cogeneration and other facilities, all of which adopt environmentally friendly virgin pulp and papermaking technology. On February 28, 2021, the groundbreaking ceremony of the project was held, but as of the announcement date, the cumulative investment was only 347.3793 million yuan, which was far lower than the original plan.

Reason for termination: the double impact of market environment and financial pressure

In recent years, the domestic paper industry has faced severe challenges. On the one hand, the concentrated release of industry production capacity has led to an imbalance between supply and demand, and the prices of major paper grades such as white cardboard have continued to fall, and the profitability of enterprises has been greatly compressed. Chenming Paper's 2023 financial report shows that its net profit fell by 23% year-on-year, and the gross profit margin of the white cardboard business shrank to 15%. On the other hand, financial institutions are cautious about asset-heavy projects, and the failure of the syndicated loan of the Huanggang Phase II project to be successfully formed, coupled with the intensification of the company's liquidity pressure, may further deteriorate the financial situation if it continues to advance.

In the announcement, Chenming Paper stressed that the termination of the project was "based on the principle of prudence" and aimed at avoiding the long-term drag of capital expenditure on liquidity and safeguarding the interests of shareholders.

Restructuring of business: Divestment of non-core assets and focus on the main business

The termination of the Huanggang Phase II project is a key step in Chenming Paper's strategy to optimize its business structure in recent years. Since 2020, the company has continued to divest non-core businesses, including the sale of subsidiaries such as Chibi Chenming and Yanbian Chenming, the withdrawal from non-core fields such as Haiming Mining and Jinxin Futures, and the significant reduction of the scale of financial leasing business. After this decision, the company's resources will be further inclined to the core business of pulp and paper, and strengthen the competitiveness of mature sectors.



At the financial level, the termination of the project is expected to reduce the follow-up capital expenditure by more than $9 billion. In recent years, Chenming Paper has significantly improved its liability structure through asset disposal, and its financial expenses will decrease by 6.38% year-on-year in 2023 and will continue to be optimized in the first quarter of 2024. This "disconnection" will further reduce potential risks and make room for cash flow.

Industry Trends and Strategic Shifts

At present, the paper industry is undergoing a deep adjustment. According to data from the China Paper Association, the growth rate of domestic pulp consumption will slow down to 2.1% in 2023, while the new production capacity will increase by 8% year-on-year, and the market competition will be fierce. Chenming Paper chose to shrink production capacity counter-cyclically, and instead focused on the research and development of high value-added products, cost reduction and efficiency increase. The company plans to strengthen the production of high-end cultural paper, specialty paper and other high-margin varieties, while optimizing procurement and supply chain management, and improving cost control capabilities.

According to the analysis of industry experts, Chenming Paper's decision-making is in line with the general trend of "de-capacity and structural adjustment" in the industry. The CITIC Securities research report pointed out that in the future, leading enterprises with technical advantages, financial strength and environmental compliance will be more resilient.

Next steps and market outlook

According to the announcement, Huanggang Chenming Paper Technology, a subsidiary of Chenming Paper, intends to acquire 39.98% of the share of Chenming Huanggang Fund for 439 million yuan to enhance its control over the Huanggang base. The company said that in the future, it will dynamically adjust the layout of production capacity, give priority to ensuring the stable operation of existing bases, and actively explore opportunities in overseas markets.

The market generally believes that although short-term pain is inevitable, Chenming Paper is expected to occupy a more favorable position in the industry reshuffle through strategic contraction and focus, laying the foundation for long-term sustainable development.