中顺洁柔(002511)

Strong momentum. C&S Paper, one of the “Big Four” tissue papermanufacturers in China, has been enjoying brisk growth since 2015, withoperating 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 arobust CAGR of 10.53% from 390,000 tons in 1985 to 8.68mn tons in2016, with the percentage of toilet paper shrinking from above 90% toaround 60% while facial tissue quickly picking up the slack. The Chinesetissue paper market is currently worth around RMB90bn, and looks setto grow at a pace of 8%-10% going forward, with non-toilet tissue beatingthe 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 grossmargin non-toilet tissue products to 53.54%, with its deluxe “NaturalWood” series selling at a premium of 30-40%. (2) Capacity. On top of acurrent capacity of over 500,000 tons, some capacity expansion projectsare to kick off in the near future targeting the high-end segment. (3)Marketing. A more than 1,000-strong marketing team (many of thempoached from its rival GHY Paper) alongside over 1,700 dealers reach outto nearly 2,000 Chinese cities. (4) Incentives. Stock incentive plans areput in place to boost business performance.

Peer comparison. C&S Paper focuses on tissue paper, targeting differentconsumer groups with different offerings. The company has created aretail fortress through strategic partnerships with supermarket chainssuch as Walmart, Carrefour and PARKnSHOP. Hengan (1044 HK) ispursuing a flattened operational model featuring full delegation anddecision-making autonomy. Vinda (3331 HK) is branching out into newareas such as paper diapers and sanitary towels. GHY Paper, a subsidiaryof APP, one of the world’s largest pulp and paper companies, enjoysstable raw material supply and strong sales channels throughout 160countries 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 quartersof 2017. We project the company to net a profit of RMB353mn/465mnfor 2017/2018, up 35.6%/31.7% YoY, corresponding to EPS ofRMB0.47/0.61 and 30x/23x PER. The company currently has a valuationof RMB10.6bn. Maintain Buy.

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