On January 23, Chenming Paper released its 2024 annual earnings forecast, expecting a net loss of 6.5 billion yuan to 7.5 billion yuan, a significant expansion from the 1.281 billion yuan loss in 2023. The two-year cumulative loss is as high as 7.781 billion yuan to 8.781 billion yuan, wiping out 8.134 billion yuan of cumulative profit over the five-year period from 2018 to 2022 in one fell swoop.
As a matter of fact, Chenming Paper's operational woes were already apparent as early as November 2024 . At that time, the announcement showed that the cumulative overdue debt principal and interest amounted to 1.820 billion yuan, and it had to take production restriction and shutdown measures for a number of bases, including its headquarters in Shouguang, Zhanjiang, Jiangxi, Jilin, etc., and the shutdown capacity amounted to 7.03 million tons, which accounted for 71.7% of the total capacity.
From 1.8 billion yuan of overdue debt to 7.03 million tons of production capacity shutdown, Chenming Paper's predicament is not formed in a day. We roughly sorted out the development trajectory, which may be able to answer some of the causes of the current situation.
In 1987, Chen Yongxing, then deputy mayor of Taitou Township, Shouguang County, took over the Shouguang County Government Paper Mill, which was on the verge of bankruptcy and was indebted for more than 20 million yuan. Through the implementation of market-oriented reforms, the enterprise gradually got out of the predicament.
In 1993, the enterprise completed the shareholding system reform and started the road of expansion, and then it was listed on Shenzhen Stock Exchange and Hong Kong Stock Exchange successively, becoming the first A+B+H share listed company in China.
Through the merger and acquisition of paper mills in Hanyang, Hubei, Jilin and Jiangxi, the scale of the company expanded rapidly. By 2021, the annual output of Chenming Paper had reached 5.77 million tons, accounting for 7.46% of the national market share, ranking fifth in the industry.
The turnaround came in 2020. This year, the country introduced the environment conservation policy known as “the most stringent plastic restriction in history” and the paper industry is generally optimistic about the “paper instead of plastic” market prospects. Chenming Paper then announced plans to invest 12.8 billion yuan to expand production.
However, market demand did not grow as expected. Minsheng Securities research report shows that between 2021 and 2023, the paper industry production capacity continued to expand, while consumption downgrades lead to market shrinkage, the supply and demand imbalance is becoming increasingly serious, and later, overcapacity directly led to the product price plummet.
Chenming Paper's main product, white cardboard, for example, fell from a peak of 11,000 yuan / ton to the current of 4,000 odd yuan / ton. During the same period, the hardwood pulp prices remain at about 6000 yuan / ton, resulting in a serious cost inversion.
This also puts the entire industry in a slump. Another paper company Huatai is expected to make a net profit of only 33.5 million to 49.9 million yuan in 2024, a year-on-year drop of up to 78.96% to 85.87%.
In addition to the industry's difficulties, the financial leasing business, which has been laid out since 2014, has become another straw that crushed Chenming Paper.
Within four years, the company set up six financial leasing companies, two of which had registered capital of more than 5 billion yuan. These businesses initially performed brightly, contributing 600 million to 900 million yuan of net profit to the company each year between 2015 and 2017.
But by 2019, the situation took a sharp turn for the worse, and the company had to accrue credit impairment losses of 1.034 billion yuan, of which bad debt losses on finance lease payments amounted to 524 million yuan.
The rapid climb in the scale of debt puts Chenming Paper in a difficult situation.
At the end of the third quarter of 2024, the company had total assets of 75.194 billion yuan and total liabilities of 55.275 billion yuan, with a gearing ratio of 73.51%, much higher than the industry's average level of 58.05%, with only 10.053 billion yuan of money funds left on the books and short-term borrowings of up to 29.991 billion yuan. In addition, the total balance of external guarantees of the company and its subsidiaries amounted to 19.669 billion yuan, accounting for 117.83% of net assets.
In the face of the crisis, the relevant departments of Shandong Province quickly set up a debt committee, and reached a preliminary agreement with financial institutions not to withdraw and suppress loans.
Chenming Paper is also active in self-help with the sale of futures, hotels and other non-core assets, on the other hand, the introduction of new management team. Wang Dongxing, former chairman of Sunshine Paper, took up the post of chairman of Chenming Holdings, Hu Changqing as the new chairman of the listed company.
As of January 23, the Huanggang base has resumed normal production and part of the production line reopened in Shouguang base with restored capacity accounted for 23.23%. The frozen funds also dropped to 45,122,200 yuan from 64,837,000 yuan in November.
Now for Chenming Paper, with losses of nearly 8 billion yuan in two years, 70% of the production capacity was forced to stop. There are only 10 billion yuan of monetary funds left on the books but carrying 30 billion yuan of short-term borrowing.
