China Galaxy Securities: Paper industry recovery at the bottom, focus on downstream demand performance.

China Galaxy Securities released a research report stating that the current paper industry is at the bottom of its recovery, with a reduction in pulp paper supply and a rebound in demand for waste paper during the peak season, leading to price increases. Looking ahead, there will be a significant increase in new production capacity for duplex board and white board paper by 2025, which may bring some pressure. However, the increase in production capacity for duplex board, corrugated board, and box board paper will be limited. Meanwhile, the central government has shown strong support, and there is hope for continuous policy support to boost the economy and domestic demand, which is expected to drive the paper industry upward. China Galaxy Securities' main points are as follows: Raw materials: In terms of wood pulp, on January 8, 2025, the daily offshore prices for ARAUCO softwood pulp (Silver Star) and ARAUCO hardwood pulp (Star Bright) in the main port market in China were 795 and 570 US dollars per ton respectively, with year-on-year changes of +4.61% and -12.31% respectively, and month-on-month changes of +1.27% and +3.64% respectively. In terms of waste paper, on January 8, 2025, the daily average price of waste yellow board paper (Grade A) in China was 1,570 yuan per ton, with year-on-year and month-on-month changes of -0.57% and -1.2% respectively. In December, the import price for No. 12 mixed waste fiber pulp in Southeast Asia has risen, with mainstream offers in the market ranging from 250 to 270 US dollars per ton. Cultural paper: On January 8, 2025, the daily average prices for duplex board and duplex paper in China showed year-on-year changes of -6.28% and -4.16%, and month-on-month changes of +0.93% and +1.1% respectively. Shandong Chenming Paper's production restriction has alleviated industry supply pressure, leading to price increases. Looking ahead, there will be a new production capacity of 1.55 million tons for duplex board paper by 2025, with a growth rate of 8.71%, which may bring certain pressure on the supply side; the production capacity for duplex paper has remained stable since 2016, and in the short term will benefit from supply reduction, but future performance will still depend on end-demand. White board paper: On January 8, 2025, the daily average price of white board paper in China showed a year-on-year change of -10.04% and a month-on-month change of +1.9%. Benefiting from the supply reduction from Shandong Chenming Paper, industry expectations have improved, leading to a stabilizing rebound in prices. The demand for white board paper remains weak, with consumption in September, October, and November 2024 down by about 20% year-on-year. There will still be significant production capacity pressures in the future, with an estimated 4.5 million tons and 3.7 million tons of capacity expected to be added in 2025 and 2026 respectively, leading to increased competitive pressure. Corrugated board paper: On January 8, 2025, the daily average prices for corrugated board and box board paper in China showed year-on-year changes of +0.95% and -1.71%, and month-on-month changes of +2.18% and +1.67% respectively. As the Spring Festival and New Year holidays approached in December, large-scale paper mills continued to announce price increases, with smaller mills following suit actively. Downstream packaging factories have maintained a relatively stable order intake, replenishing stocks as needed, providing support for paper prices. The inventory levels of paper companies remain at medium to low levels, with large paper mills announcing price increases in early January, and scheduled maintenance shutdowns for some mills in the second half of January, indicating continued support on the supply side. Household paper: On January 8, 2025, the daily average price of wood pulp household paper in China showed a year-on-year change of -4.2% and a month-on-month change of flat. Local paper companies in Shandong still face shutdowns or production restrictions, but an increase in low-priced external sources has led to a slight decrease in market prices; in Hebei, market competition continues, with sporadic low prices still present. However, due to rising raw material prices and increased cost pressures, market prices have remained stable. Paper companies in Henan are fulfilling orders, with production and sales relatively stable, and paper prices remaining steady; paper deliveries in Sichuan and Chongqing have slowed down, but due to some mills shutting down or reducing production in the second half of January, market prices have fluctuated within a certain range; paper companies in Guangxi have moderate delivery schedules, combined with a drop in upstream raw material prices, dragging down paper prices slightly. Investment recommendations: It is recommended to pay attention to leading companies in the pulp and paper sector such as Shandong Sun Paper (002078.SZ) and Yueyang Forest & Paper (600963.SH), leading companies in household paper such as Hengan International (01044) and C&S Paper Co., Ltd. (002511), and leading companies in specialty paper such as Hangzhou Huawang New Material Technology (605377.SH), Xianhe Co., Ltd. (603733.SH), and Wuzhou Special Paper Group (605007.SH). Risk warning: Risks of lower-than-expected downstream demand; risks of significant increases in raw material prices; risks of production capacity falling short of expectations; risks of intensified industry competition.