Chairlady's Report

Dear Shareholders,

The toughest and sternest year ever
During the first half of the financial year, as affected by the sporadic COVID-19 outbreaks and the lockdown measures across China, consumption remained sluggish and the packaging paper industry suffered from suspension of production frequently. Stepping into the second half of the financial year, the macroeconomy remained gloomy in the post-pandemic era. Amidst the slow recovery of domestic demand and export, coupled with various unfavourable factors such as interest rate hikes, the Group was confronted with the most challenging business environment ever.

Under the impact of weak economic activities, release of new production capacity and intensified import competition, secure sales volumes and avoid capital chain rupture were our top priorities during the Year. We, on the one hand, focused on developing new products and finding new customers by leveraging the competitive edge in raw materials derived from self-produced wood fibre and wood pulp, while on the other hand, responded to market changes by adopting flexible approaches such as lower prices to promote sales and suspend production to reduce inventories. Meanwhile, we reduced expenses in all aspects through stringent control over cash flows and prudent management of financial risks. Owing to these efforts, we saw a slight increase in sales volume during this financial year. Our capital chain remained solid and intact, and the performance in the second half of the financial year has improved remarkably as compared to that of the first half of the financial year despite a full-year loss.

Forge ahead with a wider outlook

As the old saying goes, “Good honing gives a sharp edge to a sword, bitter cold adds keen fragrance to plum blossom”. We believe that the worst is now behind us and the adversity will provide impetus for enterprises to forge ahead albeit the headwinds. Entering the post-pandemic era, it is expected that the Chinese government’s supportive policies for the economy and the relevant industries will buoy the demand for packaging paper, while the pull back of prices of recycled paper and coal will foster positive support for profitability. In the long run, the resilience of China’s rigid demand market will lay a solid foundation for the packaging industry, whereas the “Plastic Ban Order” will create new drivers for the demand of white cardboard and packaging paper for express delivery. Further driven by various factors such as environmental protection, raw materials and market conditions, market consolidation will inevitably be expedited.

The quality of product today determines the market for tomorrow. Setting its sight on perpetuating an enterprise that thrives for a century, Nine Dragons Paper must take a wider outlook and restructuring will be the main focus of its future strategies. In other words, while optimizing the fibre-based raw material structure to stabilize both the quality and costs of products, it will also increase the proportion of high-end products to realize continuous upgrade of the profit mix. In pursuit of this vision, the Group continued to strengthen its core competitiveness and pressed on with the fully-integrated pulp and paper mill projects in an orderly manner. It is expected that the Group’s production capacity for fibre raw materials will exceed 6.83 million tonnes in the future, including production capacity of 4.07 million tonnes for wood pulp, 0.7 million tonnes for recycled pulp and 2.06 million tonnes for wood fibre.

Currently, Nine Dragons Paper is the globally largest papermaking group with a production capacity of over 20 million tonnes. In the next two years, an additional production capacity of 4.25 million tonnes will be added to the Group, and production capacity expansion projects will be carried out for high-end products such as virgin kraftlinerboard, bleached folding boxboard and sack kraft paper to capture greater market share, all the while paving way for enhancing the profits generated by every tonne of production capacity.

With its vertically integrated production chain, the Group’s downstream packaging business was able to capitalize on the resource advantages of Nine Dragon Paper over the small packaging plants in the industry to better align with market developments, and provide end-customers with one-stop and high-quality products and services.

Endeavor to stabilize at a reasonable profitability level
As the Chinese economy has strong resilience and potential for development, its fundamentals for long-term growth will remain unchanged. Nevertheless, global risks such as high inflation rate and geopolitical conflicts in the near term should not be underestimated, let alone the impacts of the supply shock. As a leading enterprise, Nine Dragons Paper will stay practical and realistic in making every move towards sustainable interests. Pursuing the primary goal of balanced production and sales, we will strive to achieve a turnaround at the soonest possible and stabilize at a reasonable profitability level in the coming year:

  1. Carry out transformation of raw material structures - While giving full play to the advantages of self-produced wood pulp and alternative raw materials, we will ensure the procurement of quality recycled paper in sufficient quantity with an aim to achieve cost reduction and efficiency enhancement;
  2. Launch high-quality and diversified products - In addition to capturing market share by leveraging our competitive products, we will raise the proportion of high-end products and find new customers;
  3. Implement cost reduction and destocking measures - We will exercise effective control over inventory level, working capital and cash flow management, save costs, and strike a balance between financial costs and foreign exchange risks; and
  4. Implement internal risk control measures - The level of clean and civilized production will be improved with strengthened management over aspects such as fire prevention, safety and anti-corruption. Serving as an excellent model for our peers, we will continue to further implement our environmental protection and low-carbon governance measures.

On behalf of all members of the Board, I would like to take this opportunity to express my sincere gratitude to all stakeholders. I will closely work with all employees of Nine Dragons Paper to continuously operate in a pragmatic manner and endeavor to make profits with our all-out efforts.

Cheung Yan

25 September 2023