Nine Dragon Papers and the Credit Crisis of 2009-MAH_230415_27874_1_67742

Question 1: Performance of Nine Dragons during crisis

Established in 1995, Nine Dragons Paper Limited (ND Paper) is the largest producer of container board products in China, and is one of the largest in the world in terms of capacity. The company currently has four production bases in Dongguan, Taicang, Chongqing and Tianjin. In May 2008, ND Paper acquired a 60.0% controlling interest in an existing mill in Vietnam, expediting the company’s entry into ASEAN markets. ND Paper was listed on the Main Board of the Hong Kong Stock Exchange in March 2008.

ND Paper and its subsidiaries primarily produce liner board, including craft board, and white top liner board, high-performance corrugated medium and coated duplex board. The company is also engaged in the production of unbleached craft pulp through a joint venture in Inner Mongolia and the production of high value specialty paper and pulp (bamboo and wood) in Leshan, Sichuan province.

Demand Determinants

Growth in downstream manufacturing and publishing industries

The majority of paper produced in China is further processed into converted paper products or used in the publishing of newspapers, books, magazines, directories and greeting cards. The level of activity in these downstream industries directly influences domestic demand.

The level of demand in these downstream industries is influenced by macro factors, including business activity in the country, consumer and business sentiment, the general state of the economy, and the level of import penetration in each respective downstream industry. When the economy is prosperous, demand for end-products such as office stationery, packaging, high quality imaging paper, magazines, and books increases, which benefits manufacturers of these products. At the same time, it increases demand for paper used in production.

Substitution of printed media

Although newspaper, books and magazines have some advantages over their electronic counterparts, the emergence of new media will eat into the market share of printed media. As a consequence, demand for paper from this segment has decreased in the past decade. This is a great challenge for the print media as well as the Paper and Paperboard Manufacturing industry.

However, demand for high-quality imaging paper has increased with the wide use of jet-printers and similar technologies. The overall effect has been a decline in demand for traditional paper products such envelopes, business forms and application forms with an increase in demand for technology supporting products such as coated printing paper.

Improvements in recycled paper products

With technological developments allowing for improvements in the quality of paper manufactured from recycled materials, companies have increased the use of such materials in production. This makes paper increasingly environmentally friendly, which will result in growing demand for its use in production.

The three largest trading partners of China in the Paper and Paperboard Manufacturing Industry are Japan, Hong Kong and Australia.

The industry’s exports decreased by 14.8% in 2010 to $3.4 billion or 3.8% of industry revenue. This decline resulted from weaker foreign demand for paper and lower pricing levels. Exports recovered and increased 25.4% and 2.6% in 2011 and 2012, respectively, to $4.3 billion and $4.4 billion. In 2013, exports came to $5.1 billion with a growth rate of 17.4%. In 2014, exports are estimated at $5.4 billion, up 6.2% year on year.

Major exported products in the industry in 2013 included paper and paperboard for writing and printing, craft paper and paperboard, as well as uncoated paper and paperboard. These products accounted for over 50.0% of total export value in 2013.

The value of imports decreased 19.9% in 2010 to $3.2 billion, which accounted for 3.6% of domestic demand for the industry’s products, down from 7.6% in 2007. These declines were attributable to falling paper prices while trade volumes of paper and paperboard in terms of weight also declined from 2009. In 2011 imports of the industry increased 3.0% to $3.3 billion due to appreciation of the RMB. In 2012 and 2013, the industry’s domestic products and market remain structural adjustment, imports decreased correspondingly. In 2014, imports of the industry are expected to regain to increase 7.8% to $3.0 billion.

China mainly imports craft paper and paperboard, multi-ply paper and paperboard, unbleached craftliner as well as paper and paperboard for writing and printing.

A large proportion of the industry’s operations are located in the East China and Middle South China regions. Shandong, Zhejiang, Jiangsu, Henan, Guangdong ,Fujian and Hebei provinces are estimated to account for 75.0% of industry revenue in 2014.

Question 2: Mr Cheung Reaction Shandong, Zhejiang and Jiangsu

East China is the largest region in the industry. The most dynamic areas, Shandong, Zhejiang and Jiangsu, make up 49.4% of industry revenue in 2014.

The East China region has the most highly developed economy in China, with well-established infrastructure and advanced logistics systems. This gives rise to conveniences in purchasing raw materials, introducing advanced technologies and distributing products. This industry also benefits from various financing channels, including the bank system, support from local governments, foreign capital and private capital.

The education level of the large population in this region ranks high across China due to the progress of the local economy. Therefore, local demand for various publications and newspaper is considerable.

Shandong is the main province in this industry in China with an estimated revenue share of 27.0% in 2014. Establishments located in Shandong province will account for 9.5% of the industry’s total in 2014, with 18.5% of industry employment. Six of the top ten players in the industry are located in this region.

Jiangsu and Zhejiang provinces are expected to contribute 12.6% and 9.8%, respectively, to industry revenue in 2014. Establishments located in this region are estimated to account for 26.6% of the total, with 19.5% of industry employment.

Henan, Guangdong and Hunan

Middle South China ranks second in terms of industry revenue, contributing about 25.6% of the total. Provinces such as Henan, Guangdong ,Fujian and Hebei are major production bases.

Henan province is expected to account for 8.4% of industry revenue in 2014, with only 6.6% of the industry’s establishments. This shows that enterprises in this region are relatively large in scale.

Guangdong is the manufacturing base of China and is adjacent to two major markets: Hong Kong and Macau. About 10.8% of establishments in the industry are located in Guangdong in 2014, and these manufacturers are expected to generate 9.5% of total industry revenue using 9.5% of industry employment.

Revenue generated from Fujian and Hebei province accounts for 7.7% of the total in 2014. About10.3% of total industry establishments are located in this region, with 7.5% of industry employment.

Cost Structure Benchmarks


Profit as share of total industry revenue was estimated to decrease over the past few years to a 5.5% in 2014. China mainly manufactures low and medium-grade paper products. High-grade products with high profitability account for a fairly small percentage of total output, although this product segment is expected to grow in the future. Profit volatility is mainly caused by fluctuations in the costs of raw materials and paper products, and demand from downstream industries.


For the Paper and Paperboard Manufacturing Industry in China, the purchasing of raw materials and manufacturing facilities is the single largest expense. In 2014, purchasing costs are estimated at 64.2% of total industry revenue.


Wages account for 3.6% of total industry revenue in 2014, with management and administration costs making up a further 2.7%. Productivity has increased with greater use of modern machinery and production lines; however, rising labor costs have led to wages as a share of revenue increasing from 3.4% in 2007.

Research and development (R&D) activity is estimated to absorb 0.9% of total industry revenue in 2014. With an emphasis on pollution reduction and further industry restructurings, R&D investment is expected to continue increasing in the near future.

Depreciation and utilities

Given the extensive manufacturing facilities used within this industry, depreciation and utility expenses (such as water and electricity) are high at 6.1% and 2.9% of revenue, respectively, in 2014.

Financial and other expenses

Financial expenses (i.e. tax and interest) are expected to account for 6.8% of total industry revenue in 2014. Other expenses include transportation, insurance, maintenance on fixed property and equipment, pollutant discharge fees and other miscellaneous costs.


Although China enjoys a large market for paper and paperboard, demand for different kinds of products varies significantly. Additionally, regional disparities must be taken into consideration. For example, in the Pearl River Delta and Yangtze River Delta, the export-oriented economy is booming, and demand for quality packing board is therefore high.


The quantity and quality of available fibrous raw materials is a key basis of competition. Since different kinds of paper and paperboard require different fibrous resources – for example, newsprint paper production mainly employs mechanical pulp – it is important for firms to investigate whether their key products match the advantages of the fibrous resources in related regions.

The Paper and Paperboard Manufacturing industry also uses large amounts of water in the production process. Also, to ensure raw material supply and reduce costs, many large manufacturing groups have developed their own pulp woods, which require significant water supplies. Therefore, if the located region has low rainfall, and the available water resources of lakes and rivers are not adequate, the operational scale and choices of product varieties are restricted.

The industry is also considered a heavy polluter, and the government has adopted volume controls for pollution discharges in each region. Some projects may not gain approval from local authorities due to volume quotas.


The level of available equipment largely determines the quantity and quality of paper products. Modern equipment can be expensive and enterprises often need to update equipment to maintain a competitive advantage.


For certain products in this industry, brand names can be another source of competition. For example, Chen Ming Group has developed more than 30 new products under the brand of Chen Ming, which caters to different markets.

External competition

Competition from external sources includes alternative products such as plastic, wood, glass, metal, and other materials used in the production of packaging. While paper is considered favorable in terms of recycling and disposal, some consumers may choose other packaging based on durability or reusability. Competition at this level has remained relatively constant over the past 10 years.

Since imported products account for a small proportion of domestic demand and have been decreasing, competition from this segment is relatively light. Imported items are mainly high-end products.

The Paper and Paperboard Manufacturing industry has high barriers to entry, most of which are based on the start-up costs of a new mill and government regulations. Paper-making machinery and equipment can be very costly, particularly those encompassing the latest technology. A new entrant will need to secure a large plant for operations, which is costly. As such, the cost of starting a business is relatively high compared to other manufacturing industries that may require cheaper and smaller machinery.

Considering the high cost of operations, new businesses are likely to finance the start-up through loans. Securing funding can be costly and difficult, depending on the type of business and its prospects. Banks and financial institutions calculate the risk associated with each new business, and are more reluctant to lend money to a company entering a competitive market with a poor chance of success. Businesses with niche products are more likely to secure financing.

Stringent environmental protection guidelines impose high ongoing costs on the industry. New operators must comply with many requirements before starting operations, which increases the costs to open a business, and the time required to make the business compliant.

Regulations relating to the extraction of wood from plantations and native forests also limit the available supply of wood pulp while technological advancements in alternative fibers have not yet become financially viable on a large scale.

Considering the size of operations and the already well established distribution channels of larger players, the most successful entrant is likely to be a larger company already operating in a similar industry, such as pulp manufacturing. By expanding operations, instead of starting up new ones, economies of scale are created, and key inputs are secured. Also, smaller companies with niche products may be successful, solid investment is needed to be able to approach key markets.

For every dollar spent on labor (including wages, management and R&D expenses) about 86 cents are invested in capital. Capital investment is mainly in heavy machinery and equipment, through purchases of newer models or upgrades to existing ones. The results of this capital investment have been evident in rising labor productivity and decreasing employment.

As the industry is moving from low and medium-grade paper and paperboard products to high-grade products, the requirements for modern equipment and techniques, such as large-scale automatic production lines and pollutant disposal equipment, are increasing. Thus, the industry’s capital intensity is expected to rise in the coming years.

Technology & Systems

The level of technology change is high More Info

The Paper and Paperboard Manufacturing Industry in China is subject to a high level of technology change, which is reflected in the elimination of outdated production methods and the investment in fixed assets among large enterprises.

Previously, the industry was thought to have high resource consumption and severe pollution problems. Before the Ninth Five-Year Plan (1996 to 2000), most of the industry’s manufacturers were small enterprises with outmoded techniques and equipment that lacked adequate disposal facilities for polluted water, a by-product of the industry. Since the enforcement of environmental protection policies, the industry has been forced to introduce advanced techniques. Meanwhile, the government launched technological projects supported by national bonds to facilitate the upgrade of large enterprises.

A total outdated production capacity of 6.5 million tons was eliminated during the Eleventh Five-Year Plan (2006 to 2010). The gap between demand and supply left by these reductions will be filled by enterprises with advanced manufacturing techniques.

Apart from the new industry policies that have highlighted industry upgrades, the entry of foreign enterprises has also promoted technology upgrades for the industry. Four domestic enterprises among the top five in the industry have all developed new projects with large foreign enterprises to improve their own productivity and produce better quality paper and paperboard.

Revenue Volatility

The level of volatility is medium More Info

Over the five years through 2014, the annualized growth rate of the industry is expected to be 11.5%. However, growth was slow in 2012 due to the global recession, and growth was low in 2013 as there was currently an oversupply of paper products on the market. In 2014, industry revenue is expected to continue the steady growth. Prior to 2009, volatility was relatively mild, with industry revenue growing strongly and steadily due to the strong overall economic environment. Revenue volatility is mainly influenced by price changes (including exchange rate changes) and significant shifts in demand, such as in 2009.

Regulation & Policy

The level of regulation is heavy and the trend is increasing More Info

According to the 12th Five-Year Plan (2011 to 2015), over 10 million tons of outdated paper producing capacity will be eliminated. During this period, enterprises in the industry are expected to control producing volume, adjust the structure and reduce energy consumption. Mergers and acquisitions are also encouraged to expand production scale.

Energy conservation and emission reduction

In 2007, the State Council issued the Working Scheme of Energy Conservation and Emission Reduction. The Scheme demanded required that about 6.5 million tons of outdated production capacity be eliminated between 2006 and 2010. Moreover, paper-making enterprises with production scales below 50,000 tons were shut down.

Paper-making industries remain one of the major industries under close supervision, since straw pulp still accounts for a large percentage of raw materials and many enterprises are heavy polluters. In 2005, the Paper and Paperboard Manufacturing industry discharged 3.7 billion tons of waste paper, accounting for 17.0% of the total waste paper discharged in China, and emitted 1.6 million tons of COD (Chemical Oxygen Demand), accounting for 32.0% of the total emissions in China.

Paper-making industrial policy

In October 2007, the State Development and Reform Commission (NDRC) enacted the Paper-Making Industrial Policy, which planned to:

(1) Control paper and paperboard projects; increase production capacity of paper and paperboard by 26.5 million tons by 2010; eliminate 6.5 million tons of outdated capacity; reach 90 million tons of effective production capacity; adopt a sustainable development approach; and, encourage recycling in the industry.

(2) Implement industry restructuring; increase industry concentration; meet domestic demand by adjusting raw material supply, product structure and enterprise structure.

(3) Focus on technological innovations and form a consistent system of production and research with enterprises as the major force. Encourage the development of a series of large pulp and paper machinery manufacturing enterprises with advanced techniques and equipment to enhance research and design abilities.

(4) Implement laws and regulations about environmental protection, resource conservation, labor protection and production safety. By 2010, water consumption per ton of paper and paperboard should be reduced to 80m3, down from 103m3 in 2005. Overall average resource consumption (standard coal) should be reduced to 1.1 tons from 1.38 tons in 2005, and COD emissions should be reduced to 1.4 million tons from 1.6 million tons in 2005.

Pollutant discharge standard for pulp and paper-making

The Pollutant discharge standard was implemented in August 2008 by the State Environmental Protection Administration and the State General Administration for Quality Supervision and Inspection and Quarantine (AQSIQ). As this industry is a heavy resource consuming industry with high pollution, manufacturers in the industry face high environmental protection costs.

Forestland tenure reform

Forestland tenure reform is a driving force for listed company in the industry in China development, which have forest resource to to assure the supply of raw material. As more measures about forestland tenure reform were introduced, forest right value would be up. At last, its positive influence to the industry will be more.

Industry Assistance

The level of industry assistance is medium and the trend is decreasing More Info

Export rebates

The Fiscal Department and the State Taxation Administration reduced China’s export rebates on paper and paperboard from 13.0% to 0.0% in 2004. Such a steep reduction of export rebates indicated that the government did not want to encourage the fast growth of paper product exporting due to the high resource consumption and low value added of the industry.

In 2007, export rebates for paper products not classified in this industry were reduced from 13.0% to 5.0%. However, due to a sharp decline in exports since the end of 2008, the government increased rebate rates of certain paper products back to 13.0% in April 2009.

Import tariffs

There are 139 paper products that are subject to China’s import tariffs, ranging from 2.0% to 7.5%. Some rates were adopted as early as January 2002, such as customs rates for corrugated paper and writing paper. The import tariff for newsprint was adopted in June 2006.


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  • Heng, P. A. N. (2013). Research on the Relationship between Economy and Logistics Industry During ‘Eleventh Five Year Plan’Period in China. Logistics Engineering and Management9, 002
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  • Fleiter, T., Fehrenbach, D., Worrell, E., & Eichhammer, W. (2012). Energy efficiency in the German pulp and paper industry–A model-based assessment of saving potentials. Energy40(1), 84-99
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  • Newell, J. P., & Vos, R. O. (2011). “Papering” Over Space and Place: Product Carbon Footprint Modeling in the Global Paper Industry. Annals of the Association of American Geographers101(4), 730-741
  • Wang, Y., Liu, J., Hansson, L., Zhang, K., & Wang, R. (2011). Implementing stricter environmental regulation to enhance eco-efficiency and sustainability: a case study of Shandong Province’s pulp and paper industry, China. Journal of Cleaner Production19(4), 303-310
  • Heng, P. A. N. (2013). Research on the Relationship between Economy and Logistics Industry During ‘Eleventh Five Year Plan’Period in China. Logistics Engineering and Management9, 002
  • Lin, H. C., Chan, D. Y. L., Lin, W. C., Hsu, C. H., & Hong, G. B. (2014). Status of energy conservation in Taiwan’s pulp and paper industry. Energy73, 680-685
  • Fleiter, T., Fehrenbach, D., Worrell, E., & Eichhammer, W. (2012). Energy efficiency in the German pulp and paper industry–A model-based assessment of saving potentials. Energy40(1), 84-99
  • Wei, S., Cheng, D., Sundin, E., & Tang, O. (2015). Motives and barriers of the remanufacturing industry in China
  • Newell, J. P., & Vos, R. O. (2011). “Papering” Over Space and Place: Product Carbon Footprint Modeling in the Global Paper Industry. Annals of the Association of American Geographers101(4), 730-741