Macquarie Research China Paper & Packaging23 July 2018 2Winner Takes It All Fig 1 S/D in equilibrium - 3% new supply from big playersoffset by 3% demand growth p.a.Fig 2 Actual capacity -30% vs planned additions –cancellations due to liquidity/ environmental / lack of OCCSource: UMPaper, SCi99, CEIC, Macquarie Research, July 2018 Source: UMPaper, SCI99, Company data, Macquarie Research, July2018Fig 3 ND is the biggest winner of the new wastepaper policy– quota only -7% YoY pro rata vs. industry -21% Fig 4 ND/ LM are making RMB400/t NP/t yet many smallmills with no overseas OCC are losing ~RMB200/t at spotSource: UMPaper, SCI99, Company data, Macquarie Research, July2018Source: Bloomberg, Macquarie Research, July 2018Fig 5 Due to industry consolidation, we see less marginvolatility and for NP/t to normalise at current level – i.e.RMB400-500/t for ND and HK$600-700/t for LMFig 6 ND our top pick due to most potential for organicvolume growth (mkt share gain) and attractive valuationSource: Bloomberg, Company data, Macquarie Research, July 2018Source: Bloomberg,Macquarie Research, July 2018 70% 75% 80% 85% 90% 95% 100% 30.0 35.0 40.0 45.0 50.0 55.0 60.0 %mntChina Containerboard Supply/ Demand Apparent ConsumptionCapacityUtilization (%) 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 0 2000 4000 6000 8000 10000 12000 YE 2014YE 2015YE 2016YE 2017Jun-18 ktktChina Containerboard New Capacity Pipeline Planned to complete during yearActually completed Pipeline (RHS) 4.92.39.216.44.62.26.212.9-6.6%-7.1% -32.9% -21.4% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0%-24681012141618 Nine DragonsLee & ManOther millsTotal mntChina Wastepaper Import quota 2017 YTD2018 YTDYoY%-500-300-1001003005007009001,1001,3001,5001,7001,900 Jan -14 Jul -14 Jan -15 Jul -15 Jan -16 Jul -16 Jan -17 Jul -17 Jan -18 Jul -18 Rmb/tNet Profit Per Tonne (NP/t) Estimates NDLMSmall mills Rmb 600/tprofit gapbetweenND/LM andsmall mills 159150159116 86 337 583571 322318305344 438 782 671 604 0 100 200 300 400 500 600 700 800 900 FY12FY13FY14FY15FY16FY17FY18EFY19E Rmb/tNP/t NDLM (RMB/t) 456 0 200 400 600 800 Ja n-0 8 Ja n-0 9 Ja n-1 0 Ja n-1 1 Ja n-1 2 Ja n-1 3 Ja n-1 4 Ja n-1 5 Ja n-1 6 Ja n-1 7 Ja n-1 8 Nine Dragons Implied NP/t vs. Actual NP/t Sh Px implied NP/tActual NP/t Spot NP/t: Rmb530/t Macquarie Research China Paper & Packaging23 July 2018 3Fig 7 Sensitivity Analysis – Sensitivity to RMB largely reduced. LM is slightly more sensitivity to RMB risksSource: Company data, Bloomberg, Macquarie Research estimate, July 2018Fig 8 China Containerboard Supply/ Demand Model – Largely at equilibrium with gradual new supply of 2-3% digested by astable demand of 2-3% paSource: UMPaper, SCI99, WIND, CEIC, NBS, Macquarie Research estimates, July 20183.9% 1.3% -0.8%0.0%-0.3%-0.8% -2.6% -1.3% -0.1%-0.8% -1.1% 3.9% 0.3% -0.9% -0.1%-0.3%-0.6% -2.0% -2.9%-2.5% -1.6% 0.0%0.8%0.4% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Paper ASPSales Vol.Domestic OCC proportion (+1% China OCC) Pulp Price Coal Price Effective interest rate (+25bps) OCC Price Rmb (1% depreciation vs. USD) - core earnings Rmb (1% depreciation vs. EUR) - core earnings FX gain/loss from 1% Rmb depreciation vs. USD FX gain/loss from 1% Rmb depreciation vs. EUR Tissue ASPTissue Volume Sensitivity analysis -Impact to 2018E Earnings Given 1% Increase in Various Variables Nine DragonsLee & Man Containerboards supply and demand (mnt)201020112012201320142015201620172018E2019E2020E Apparent Consumption (Containerboard)38.440.641.841.243.945.346.449.150.651.853.1 % growth7.5%6.0%3.0%-1.6%6.6%3.0%2.4%5.8%3.1%2.5%2.4% Net Imports0.90.90.80.70.60.50.61.92.02.12.1 % growth-30%11%-11%-18%-17%-4%9%210%8%2%2% Production37.539.741.040.543.444.745.847.248.649.851.0 % growth8.9%5.9%3.3%-1.2%7.0%3.1%2.3%3.2%2.9%2.5%2.4% Yr end Capacity39.944.549.251.552.650.850.751.953.755.256.4 % growth7%12%10%4.6%2%-3%0%2%3%3%2% Gross capacity addition4.07.08.05.32.73.33.14.75.35.04.7 Effective capacity deduction (closure)1.52.43.33.01.65.03.23.53.53.53.5 Net capacity addition2.54.64.72.31.1-1.8-0.11.21.81.51.2 Utilisation94%89%83%79%82%88%90%91%90%90%90% Over-supply247109643333 Over-supply %4%9%15%20%16%11%9%6%6%6%6% Downstream demand201020112012201320142015201620172018E2019E2020E Food & beverage14.615.816.716.918.219.019.520.421.021.421.8 % growth5%9%6%1%8%4%2%5%3%2%2% Home appliances10.711.812.612.412.813.113.013.714.014.214.3 % growth16%10%7%-2%4%2%-1%6%2%1%1% Furniture & building materials7.78.58.48.28.78.68.38.88.99.09.1 % growth13%11%-2%-2%5%-1%-3%6%1%1%1% Others (inc. e-commerce)5.44.54.23.74.24.55.66.16.77.37.9 % growth-6%-17%-6%-11%14%7%23%10%9%9%8% Total containerboard consumption38.440.641.841.243.945.346.449.150.651.853.1 % growth8%6%3%-2%7%3%2%6%3%2%2% Downstream demand mix % Food &beverage38%39%40%41%42%42%42%42%41%41%41% Home appliances28%29%30%30%29%29%28%28%28%27%27% Furniture& building materials20%21%20%20%20%19%18%18%18%17%17% Others (inc. e-commerce)14%11%10%9%10%10%12%13%13%14%15% Total containerboard100%100%100%100%100%100%100%100%100%100%100% Macquarie Research China Paper & Packaging23 July 2018 4Fig 9 China Containerboard and wastepaper price forecasts – we see China OCC prices remaining high due to tightness ofimported OCC and providing support for containerboard pricesSource: UMPaper, SCI99, WIND, CEIC, NBS, Macquarie Research estimate, July 2018Fig 10 More than 30% of total capacity, mainly small-sized plants with no access to cheapoverseas wastepaper are loss making at current price levels – thus providing cost push toChina containerboard pricesSource: UMPaper, WIND, Macquarie Research, July 2018Fig 11 ND – PE currently trading below -1SD of LT averageFig 12 LM – PE approaching -1SD of LT averageSource: Bloomberg, Macquarie Research, July 2018Source: Bloomberg, Macquarie Research, July 2018Containerboard- RMB/t201020112012201320142015201620171Q182Q183Q18E4Q18E2018E2019E2020ELinerboard4,1284,3853,9183,4353,3033,1823,2644,7414,7625,2215,2505,3005,1335,2875,393 YoY %6%-11%-12%-4%-4%3%45%4%28%9%-3%8%3%2%QoQ%-13%10%1%1% RMB/t increase QoQ-467-483-132-120821,476-7174592950393154106Corrugating medium3,2143,5083,2402,9162,8662,8232,9684,5724,6955,0025,0505,1504,9745,2235,380 YoY %9%-8%-10%-2%-2%5%54%7%27%6%-1%9%5%3%QoQ%-10%7%1%2% RMB/t increase QoQ-268-324-50-441451,604-51330748100402249157 OCC - US$/t US #11 CIF to China (US$/t)251259218219203186188251191210215190201203205YoY %3%-16%0%-7%-8%1%33%-27%-21%-18%-12%-20%1%1% QoQ%-12%10%2%-12%US$/t increase QoQ9-411-15-1726323255-25241 China OCC (Rmb/t)1,3111,5001,1911,1461,0601,0871,1721,8402,1362,6892,6002,7002,5312,6072,659YoY %14%-21%-4%-7%2%8%57%37%82%25%21%38%3%2% QoQ%-5%26%-3%4%Rmb/t increase QoQ189-309-45-862685668-105553-8910069200 3000 3500 4000 4500 5000 5500 13579111315171921232527293133353739414345474951 Cost: RMB/tChina Containerboard Cost Curve Nine DragonsLee & ManMedium sized plantsLow-cost Small sized plantsHigh-cost Small sized plants 55 mnt Average containerboard price:~Rmb 4600-4800/t -1SD, 6.6 +1SD, 26.0 0x 5x 10x 15x 20x 25x 30x Ja n-0 8 Ja n-0 9 Ja n-1 0 Ja n-1 1 Ja n-1 2 Ja n-1 3 Ja n-1 4 Ja n-1 5 Ja n-1 6 Ja n-1 7 Ja n-1 8 Nine Dragons 1-yr rolling fwd PE Average: 16.3x -1SD, 4.2 +1SD, 11.6 0x 5x 10x 15x 20x Oc t-0 3 Oc t-0 4 Oc t-0 5 Oc t-0 6 Oc t-0 7 Oc t-0 8 Oc t-0 9 Oc t-1 0 Oc t-1 1 Oc t-1 2 Oc t-1 3 Oc t-1 4 Oc t-1 5 Oc t-1 6 Oc t-1 7 Lee & Man 1 -yr fwd rolling P/E Average: 7.9x 。。。。。。