2016 China Paper Industry Development Situation and Strategic Measures

Guo YongxinDeputy Director of China Light Industry Information Center

June 2016

Summary

Macro environmental impact

Operation analysis on Paper Industry

Future trends

Strategic measures

Macro environmental impact

12.714.2

9.6 9.210.4

9.37.8 7.67 7.35 6.9

4 3.94

1.33

‐2.25

4.342.73 2.2 2.17 2.47 3

‐4

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0

2

4

6

8

10

12

14

16

2006年 2007年 2008年 2009年 2010年 2011年 2012年 2013年 2014年 2015年

中国GDP增速

世界GDP增速

Chinese economy has entered a period of adjustment of structure optimization, and the growth is slowing, but the growth potential is huge.

China 2015 GDP growth is 6.9%, with the growth rate less than 7% for the first time since 1990.

The total GDP reaches RMB 67.6708 trillion, and China’s economic growth is far better than the world average.

China’s per capita GDP ranks 90th in the world, and the future development space is large.

Chinese GDP growth rateThe world's GDP growth rate

Macro environmental impact Chinese authorities predict that long-term trends in China's economic

development will show a L-type situation, indicating that the economy will not have a big shock.

Premier Li Keqiang：

- Since this year, the Chinese economic operation is overall smooth, and structural adjustment and transformation and upgrading appears a good momentum.

- The comprehensive deepening reform and active opening up can keep the economic operation at a reasonable range and towards a long-term and good orientation.

Chinese government “Thirteen Five-Year" plan puts forward economic growth of not less than 6.5%.

Chinese economic overall good development momentum forms a strong support for the development of the paper industry.

Macro environmental impactWith the impact by rigid demands, the light industry develops well in the

first quarter and is thriving among the national industries. The profit growth of the light industry is higher than the revenue growth of main businesses, and the operation quality improves.

Consumer goods industry has a good momentum of development, increasing the demand for packaging and leading the development of theentire paper industry.

13.2 

29.2 27.9 

23.5 

18.3  17.5 15.3 

13.5  12.5  12.5  12.1 

6.2 4.1 

9.4  10.4 

4.9 7.5 

8.7 6.3 

0.4 

5.9  5.1 

0.0

5.0

10.0

15.0

20.0

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35.0

轻工业 乳品 玩具 日化 饮料 食品 家具 塑料 家电 自行车 农副食品

利润增长%

主营收入增长%

Growth of profit (%)Growth of revenue of main businesses (%)

Light industry

Dairy products

Toy Daily Chemical Products

Drink Food FurniturePlasticsAppliancesBicycle

Agrifoods

Operation analysis onPaper Industry

In recent years, the paper industry enters into the era of great change. Results of the change and adjustment in the industry have been initially apparent.Since this year, in the dual role of markets and policies, the overall development of the paper industry is good.

- Rapid growth of paper outputFrom January 2016 to April 2016, the national large-scale machine paper and

paperboard enterprises has completed an output of 38,806,800 tons, with a year-on-year growth of 5.13% and a “good start” for the first time in recent years.

- Tissue and packaging paper maintains a strong growthThe output of tissue increases 3.24%, and the output of containerboard increases

5.19%.- Graphic paper is still accelerating the structural adjustment

The output of uncoated printing paper is 2.4879 million tons, reducing by 4.03% on a year-on-year basis.The output of newsprint is 1.0732 million tons, reducing by 11.76% on a year-on-

year basis.The output of coated printing paper is 2.1321 million tons, reducing by 3.89% on a

year-on-year basis.

Operation analysis onPaper Industry

The industry profitability has an overall rapid growth, but the profitability varies.

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纸浆制造 造纸 纸制品制造

主营增长%利润增长%

Pulp industry loss; the profit declines 74%

Paper industry enjoys the policy support of waste paper material products VAT refund of 50% since July 1, 2015, and the profit surges 17%.

The revenue and profit of main businesses of paper products industry increase 7%.

Comparison of revenue and profit growth of main businesses of industry in the first quarter of 2016

Growth of main businesses (%)Growth of profit (%)

Pulp Manufacturing

Papermaking Paper Products Manufacturing

2603

2430 2387

220023002400250026002700

2014年底 2015年底 2016年3月Change of the number of machine paper and paperboard

companies

Paper Industry increases the degree of concentration As the market survival of the fittest and the government forcing out backward enterprises, the number of machine paper and paperboard companies reduces by 216 compared to 2014, namely 8.3% of paper companies are forced out.

Operation analysis onPaper Industry

Increased industrial degree of concentration can help the paper industry to give play to the scale economics effect, reduce pollution emissions, enhance the brand profitability and establish a good market order.

End of 2014 End of 2015 March 2016

Future trends

Recalling the past and looking to the future, look at the future trends based on the following rules:

China's paper industry has entered the era of strategy. Entrepreneurs should learn to summarize the rules of industrial development and guide the development of enterprises with the rules rather than experience.

The current two important industry rules must be noted.

- Paper output growth rate and GDP growth rate is not consistent

- Paper production and consumption are saturated in stages

At present, the total amount of paper is saturated, the output increases slowly, and some grades of paper have been saturated.

Future trends

Over the years, many research institutions have always thoughtthat paper output is positively related with the GDP growth rate,but from the current perspective, the paper output growth ratedeviates from GDP growth rate and the GDP growth rate cannot be used to measure the paper output in the future.

11.312.7

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9.6 9.210.5

9.27.7 7.7 7.4 6.9

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12.1 11.413.2

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP%

纸产量%Paper output %

8095  8168  8061 

8397 8289 

83898366 

7996 

7164 

7588  7508  7435  7375  7319 7260 

640066006800700072007400760078008000820084008600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

美国纸产量走势

Future trendsPaper production and consumption are saturated in stages. Since the beginning of this

century, the paper industry in the United States and Japan has experienced the trend

from slow growth of output, reaching the highest point, and then to negative growth.

Ten thousand tons Paper output trend in the United States

3072  3067  3046 3089  3095  3111 

31273063 

2627 

2736 2661 

2607  2624 2647 2619 

2300

2400

2500

2600

2700

2800

2900

3000

3100

3200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

日本纸产量走势

Future trends

Ten thousand tonsPaper output trend in Japan

3200 3780 

4300 4950 

5600 

6804 

7787 8391 

9389 10036 

11034 11375 11515 

1178611774 

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

中国纸产量走势

Future trends

Paper output trend in ChinaTen thousand tons

Future trendsIn 2015, paper output is 117.74 million tons, appearing a turning

point for the first time.

6804 

7787 8391 

9389 10036 

11034  11375 11515 11786  11774 

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

2006年 2007年 2008年 2009年 2010年 2011年 2012年 2013年 2014年 2015年

中国造纸产量（万吨）

Rapid growth period Steady growth period

In 2013, it was predicted that 120 million tons was the output ceiling of China Paper Industry. Obviously, the forecast is still valid.

Papermaking output in China (Ten thousand tons)

401  443  462  490 429 

369  390  369  359  350 264  274 

204 

876  877  862  842  815  809  777 

221 

563 

741  768 709 

649  663 

883  931 

1202 

1391 

1579 1669 

1330 

1183 

1019  1044 

0

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

新闻纸

未涂布书写印刷纸

涂布书写印刷纸

箱板纸

Future trendsSome grades of paper are saturated in China

Negative growth of the output of newsprint in 2010

Negative growth of uncoated writing paper in 2011Negative growth of the output of containerboard in 2012

Negative growth of coated writing paper in 2013

NewsprintUncoated writing paperCoated writing paperContainerboard

Future trends

Paper production in China is saturated, so the future investment will become more rational.

In the first quarter of 2016, total investment in fixed assets of paper and paper products industry is RMB 42.4 billion, with an increase of -11.7% on a year-on-year basis, forming a sharp contrast with 6.4% of total investment growth of national manufacturing industry.

Chairman of Huatai Paper Industry said recently that the Company would not expand largely in the paper industry in the future, with emphasis on the upgrading and transformation of the paper industry towards the papermaking research and intelligent manufacturing.

Future trends

436 470 520 550 580 620730 780 795 830

885

510 520 530 560 575 600 620 640 635 650 665790

9401050

1120 11501250

1340 1390 1360 1395 1400

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

生活用纸

包装纸

白纸板 ？

？？

Reflection:

When tissue, packaging paper and boxboard with a substantial investment and rapid growth will have a turning point?

TissuePackaging paperBoxboard

Future trends Product structure is optimized and the proportion of high-grade paper

further increases.

With the progress of living standards and improvement of technology, the proportion of high-grade paper further increases, high-grade paper will force out mid-grade paper, mid-grade paper will force out low-grade paper and low-grade paper will be eliminated in the future.

The industrial chain of paper enterprises extends and will provide consumers with personalized, customized and high value-added products.

- Develop from the industrial paper to tissue

- Develop from the production of pulp paper to the downstream paper packaging

- Develop from bulk industrial goods to daily necessities of consumers

Future trends

From paper making to fiber comprehensive utilization, the biomass project develops rapidly.

Papermaking can utilize the plant fiber. With the advancement of science and technology, paper enterprises are entering the biofuels industry. Finnish companies have become the leaders in the trend.

Paper production may slowly grow, but the comprehensive utilization on the plant fiber will be explored and is very important for social progress.

Trend: China Paper Industry enters a balanced and optimization period.

The total output of China Paper Industry enters a balanced development period.

The structure of China Paper Industry enters an optimization period.

Strategic MeasuresIn face of the future development trend of the industry, the paper industry should take the initiative to respond, to consolidate strengths and to enhance competitiveness through quality manufacturing, product cost improvement, corporate M & A and global distribution and other strategic measures, so as to cope with future challenges.

Quality manufacturing strategy

Cost performance strategy

M & A strategy

Global distribution strategy

Strategic Measures

Quality manufacturing strategy

The new high-end products can make huge profits in the paper industry. According to market demands, the production of high-grade paper is an important measure to improve product profitability.

China imports large quantities of paper and paperboard every year, remaining at around 2.6 million tons in recent years, so it is necessary to produce high-end domestic products to replace import.

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637 635 614524

441 401 358 334 336 331 311257 255 260

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Strategic Measures

Cost performance strategy

Under the premise of ensuring product quality, lowering investment and operating costs and increase production.

- Optimization of equipment, saving investment

- Process optimization, saving energy and increasing yield

- A revolutionary brand-new technology in the slurrying and environmental protection, significantly reducing investment costs

Strategic Measures

M & A strategy

In next period, enterprises will expand through M &A instead of the investment in new projects.

- M & A between the upstream and downstream of the industry chain

- M & A between domestic and foreign companies

- M & A between the industry and other industries

Strategic Measures Global distribution strategy

- “One Belt and One Road” area is the key area of global distribution of Chinese

enterprises

China currently exports about 4 million tons of paper and paper products to One Belt and One Road

area, and the import amount is about $ 7 billion. In 2015, China papermaking machinery and

equipment export amount was $ 1.222 billion, with an increase of 15.51%, mainly in Vietnam,

Indonesia, India, the United States, Belarus, Malaysia, Iran, Taiwan, Turkey, South Korea and other

areas, including $ 146 million in Vietnam, $ 141 million in Indonesia and $ 105 million in India.

Vietnam Indonesia IndiaThe United StatesBelarusMalaysiaIranTaiwanTurkeySouth KoreaOther areas

Strategic Measures

- Countries with market and resource superiority are also the key area of global distribution

Chinese enterprises are actively walking out. Shandong Quanlin Paper Industry is investing $ 2 billion in Virginia to construct the 600,000 tons of wheat straw papermaking project.

Shandong Sun Paper Industry invests in building a bio-refinery project with an annual capacity of 700,000 tons in Arkansas, with the total investment about $ 1 to 1.3 billion.

Nine Dragons Paper (Holdings) Limited and Lee & Man Paper Manufacturing Limited built a packaging paper factory in Vietnam.

Conclusions Chinese government puts forward the “innovation,

coordination, green, opening and sharing” development concept as the guiding ideology of “Thirteen Five-Year” period.

Paper industry stems from the use of green fiber and is one of the most potential industries with green features in “Thirteen Five-Year” period.

Facing the new situation in Chinese “Thirteen Five-Year” period, the paper industry should seriously sum up the rule of industry, scientifically make strategic plans, assess the situation, achieve a strategic breakthrough for the Chinese paper industry and make a brilliant contribution to the global pulp paper industry.