CSCI-Stock Connect-C&S Paper (002511 CH)：Sitting pretty on solid growth - 20171205

Sitting pretty on solid growth

Strong momentum. C&S Paper, one of the “Big Four” tissue paper manufacturers in China, has been enjoying brisk growth since 2015, with operating revenue/net profit gaining 17.34%/30.66%, 28.74%/195.27% and 19.85%/47.81% in 2015, 2016 and 1H17, respectively.

China tissue paper market. Tissue paper consumption in China grew at a robust CAGR of 10.53% from 390,000 tons in 1985 to 8.68mn tons in 2016, with the percentage of toilet paper shrinking from above 90% to around 60% while facial tissue quickly picking up the slack. The Chinese tissue paper market is currently worth around RMB90bn, and looks set to grow at a pace of 8%-10% going forward, with non-toilet tissue beating the broader industry advancing at an estimated 15%-20%.

Looking ahead, C&S Paper’s sustainable growth hinges on four aspects. (1) Profitability. The company has raised the proportion of its high gross margin non-toilet tissue products to 53.54%, with its deluxe “Natural Wood” series selling at a premium of 30-40%. (2) Capacity. On top of a current capacity of over 500,000 tons, some capacity expansion projects are to kick off in the near future targeting the high-end segment. (3) Marketing. A more than 1,000-strong marketing team (many of them poached from its rival GHY Paper) alongside over 1,700 dealers reach out to nearly 2,000 Chinese cities. (4) Incentives. Stock incentive plans are put in place to boost business performance.

Peer comparison. C&S Paper focuses on tissue paper, targeting different consumer groups with different offerings. The company has created a retail fortress through strategic partnerships with supermarket chains such as Walmart, Carrefour and PARKnSHOP. Hengan (1044 HK) is pursuing a flattened operational model featuring full delegation and decision-making autonomy. Vinda (3331 HK) is branching out into new areas such as paper diapers and sanitary towels. GHY Paper, a subsidiary of APP, one of the world’s largest pulp and paper companies, enjoys stable raw material supply and strong sales channels throughout 160 countries and regions on the back of its parent’s support.

Investment guidance. C&S Paper provided a guidance of RMB217mn-272mn for net profit attributable to the parent for the first three quarters of 2017. We project the company to net a profit of RMB353mn/465mn for 2017/2018, up 35.6%/31.7% YoY, corresponding to EPS of RMB0.47/0.61 and 30x/23x PER. The company currently has a valuation of RMB10.6bn. Maintain Buy.

Risk factors. Pulp price uptrend might carry forward while industry competition remains intense.