Chinese paper companies have accelerated overseas investment, targeting foreign waste paper and forest resources

On October 22, 2020, Nordic Paper was listed on the Nasdaq OMX Stock Exchange in Stockholm, Sweden, with an issue price of 43 SEK. It is a subsidiary of Chinese paper giant Mountain Eagle International (600567), headquartered in Backhammar, Sweden, and mainly engaged in the production of high-end specialty paper.

Mountain Eagle International acquired 100% of Nordic Paper in October 2017 for SEK 2.4 billion (about 1.952 billion yuan). As of June 30, 2020, Nordic Paper contributed a cumulative net profit of SEK 1,004 billion. In this listing, Mountain Eagle International recovered about SEK 2.417 billion through the sale of 51 percent of Nordic Paper. As of November 23, 2020, Mountain Eagle International, through the lead underwriter, exercised the over-allotment option to sell an additional 565,000 shares of Nordic Paper, equivalent to approximately 0.84% of the total share capital of Nordic Paper, for a recovery of approximately SEK 24.295 million.

With the proceeds from the sale of the stake plus dividends, Mountain Eagle International has recovered SEK 2.667 billion from Nordic Paper in just three years, more than the principal investment. More important than the cash income is that Nordic paper has injected high-end specialty paper businesses such as greaseproof paper, special kraft paper, and high-strength paper bags into Mountain Eagle International, helping it to expand the European and North American markets.

Mountain Eagle International's investment in Nordic paper is regarded as a model of overseas mergers and acquisitions of Chinese paper enterprises and a microcosm of the overseas investment boom.

Why does China's paper industry invest abroad? What are the characteristics of current investments? What are the future trends? This paper attempts to explore one or two through combing from multiple angles.

01 Raw materials, energy, environmental protection: paper companies go to sea three major pursuits

Raw materials, energy and environmental protection are the most important factors restricting the development of China's paper industry.

First of all, China's "ban on waste" limits the source of raw materials. The core raw material pulp is highly dependent on foreign countries, which has always been the biggest bottleneck restricting the development of China's paper industry. Due to the lack of wood resources in our country, the lack of domestic raw pulp production capacity, the high cost of imported raw pulp, waste pulp has been the main raw material of our paper industry, and it is heavily dependent on imported waste pulp. Due to the needs of environmental governance, China has tightened the import control of solid waste, including waste paper, since 2015, and completely banned the import of solid waste from 2021, and the raw material source of domestic papermaking enterprises has encountered a bottleneck.

Secondly, the energy-saving New Deal will increase the energy cost of the paper industry. Paper making and paper products industry is the second largest energy consumer after textile industry in China. Self-owned power plant is an important way for large paper enterprises to meet electricity demand and reduce energy costs. Under the guidance of the goal of "carbon peak, carbon neutrality", the state no longer approves the construction of new coal-fired self-owned power plants in principle, and existing power plants must also be reformed within a time limit, which indirectly increases the energy cost of paper enterprises and limits the capacity expansion of paper enterprises to increase production.

Thirdly, the paper industry is also directly affected by pollution control policies. Paper industry is one of the main industrial pollution sources in our country, which has been included in the implementation scope of the emission permit system, and the pollution without a license will face severe legal responsibility. Due to the short supply of industrial land in the southeast coastal provinces where papermaking enterprises are concentrated, local governments have high requirements for environmental protection and energy saving and strong law enforcement, which greatly limits the possibility of papermaking enterprises expanding in the region.

In this context, through "going out" to obtain high-quality and cheap resources, reduce operating costs, and expand production scale, it has become an inevitable choice for many Chinese paper enterprises.

02 America, Europe and Southeast Asia: Popular investment destinations

Foreign investment of Chinese paper enterprises began at the beginning of this century. In August 2007, Leven Paper (http://02314.HK) announced investment in construction of 1.5 million tons per annum paper mill and 1 million tons per annum wood pulp mill in Vietnam. In August 2010, Sun Paper (002078) established a wholly-owned subsidiary in Laos, responsible for the implementation of the "forest pulp and paper integration" project. With the implementation of the quota system for waste paper imports in 2015, the pace of overseas investment by Chinese paper enterprises has accelerated significantly, especially between 2017 and 2018. Nine Dragons Paper and other giants have actively established their presence in Vietnam, Malaysia, the United States, Myanmar, Laos and other places.