The cost of pulp accounts for nearly half of the cost of household paper, which is a high level. Pulp costs occupy a high proportion in the cost composition of the household paper business. Taking Vinda International as an example, according to our estimates, pulp costs account for 51% to 70% of the total cost of its household paper business from 2015 to 2021. According to the 2020 annual report of Zhongshun Jierou, pulp costs account for about 40% to 60% of the company's production costs.

The price change of wood pulp and the performance of the company's gross profit margin and net profit margin showed a reverse change relationship. We judge that this has two main effects: 1) the price of wood pulp has a certain periodicity; 2) Household paper is a 2C product, and the final price is relatively stable.

Looking back, 2018-2020 is the downward cycle of wood pulp prices, in two years, the price of softwood pulp dropped from 6795.9 yuan/ton to 4714.0 yuan/ton, a decrease of 30.6%, and the price of broadleaf pulp dropped from 5726.9 yuan/ton to 3625.5 yuan/ton, a decrease of 36.7%. At the same time, the gross profit margin of Vinda International household paper business and Zhongshun Jierou reached 38.3% and 41.3% respectively in 2020, up 10.7pct and 7.2pct respectively from 2018. As of May 2021, the price of wood pulp continued to rise, reaching a high level and falling in the second half of the year, effectively reducing the cost burden of household paper business, and having a good impact on the profitability of paper enterprises.

In 2022, the new capacity of wood pulp is expected to be put in, and the high price of pulp is expected to be loosened. New supply of wood pulp is expected to gradually come on stream. Since 2012, the global supply of wood pulp has remained relatively stable, but this pattern is expected to be broken in 2022, mainly due to the expected substantial growth of broadleaf pulp capacity. The Bracell installation in Brazil and the MAPA installation in Arauco in Chile will be put into production by the end of 2021, with a combined capacity of 4.1 million tons/year, while the UPM new installation in Uruguay will also be put into production in mid-2022, bringing 2.1 million tons/year of capacity. As the pulp and paper industry is a heavy asset industry, the capacity construction period is longer, so once the capacity construction starts, the sunk cost is higher, "difficult to go back", compared with 2020, it is estimated that the global broadleaf pulp capacity will increase by 6% and 5% respectively from 2022 to 2023, and it is expected to increase by 19% by 2025; Softwood pulp production capacity is expected to grow steadily, the annual growth rate of 2020 to 2025 is expected to be less than 1%, mainly because no new installation is put into operation, and the old installation is close to full production, and it is estimated that the operating rate of softwood pulp installation is nearly 92% in 2022.

On the demand side, the new demand for global wood pulp mainly comes from China, including cultural paper, white cardboard, household paper and so on. We believe that under the trend of paperless office, electronic teaching and online media, the overall demand for cultural paper is expected to gradually decline, taking double copper paper as an example, the apparent consumption of double copper paper from 2009 to 2020 only achieved a compound annual growth rate of 1.4%. White cardboard is used for downstream packaging, and the growth rate of consumption has decreased slightly since 2017, and the compound annual growth rate from 2017 to 2020 is 3.9%, which is in the stage of slow growth. The consumption of household paper shows a steady growth trend, with an average annual compound growth of 7.5% from 2009 to 2020. From the perspective of demand segment, there is no significant growth factor.

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