Global Paper Industry Dynamics, M&A Trends and Opportunities for Chinese Companies Rainer Häggblom Prepared for CPICC 2018 Content 1. Global P&P Industry Consolidation 2. China Industry Restructuring 3. M&A Trends and Opportunities Vision Hunters 2 Vision We want to be the first choice for forest industry advisory and strategic consulting services. INTEGRITY We do what is right - Values we apply the best working standards complying with laws and regulations CLIENT FIRST respecting rules of The client’s engagement. INDEPENDENT interests always We create value for our come first – we go clients by providing the extra mile for tailored solutions based our clients. on independent analytical opinions. 3 Global Strategy Advisory We are a network of independent thinkers and draw from the deep experience of our global team. We have a passion to turn great ideas to reality. We have expertise covering all critical parts of the forest industry sector: Fiber Energy Biorefinery Chemicals Paper, Paperboard and Packaging Forest Assets Tissue Hygiene Wood Products 4 Key Client Services We provide strategic advisory services in the forest industry sector and assist our clients in making the smartest strategic choices for future value creation. Strategic Analysis M&A Services • Corporate strategies • Partner search • Business, market and product strategy • Screening of acquisition targets • Energy strategies • Information memoranda • Conversion strategies • Business and technical due diligence • Second opinions • Post merger services New Business Opportunities Operations Improvement • Business opportunity screening • Technical feasibility • Development of new business • Operations, maintenance and quality improvement • Market and end use analysis • Supply chain management • Feasibility studies • Strategic sourcing & purchasing 5 A Global Network of Expertise Collective knowledge of global networks of consultants and associates. 6 Content 1. Global P&P Industry Consolidation 2. China Industry Restructuring 3. M&A Trends and Opportunities Vision Hunters 7 Global Paper and Board Production Global Production in 2017 was 420 Mt. Growth up to 2025 is estimated at 46 Mt North America Asia Europe Mt Mt 200 Mt 200 200 100 100 100 82 76 92 81 194197 210217 0 110100 121106 0 0 2017 2025 2017 2025 2017 2025 Africa & Middle East Latin America Oceania Mt Mt 200 Mt 200 200 100 100 100 8 18 23 22 29 28 37 11 Production 2017 0 4 4 4 4 0 0 Production 2025 2017 2025 2017 2025 2017 2025 Consumption 2017 Consumption 2025 Source: Vision Hunters, RISI Vision Hunters 8 Most Industries Progress Through a Clear Consolidation Life Cycle Industry Concentration 1989-2001 (CR3) 100 Defense 90 electrical Aluminum 80 producers Tobacco Distiller 70 Integrated oil and 60 gas Ship- Sport Shoe Rubber building Soft 50 and tire drinks Integrated steel producers Brewers Truck and trailer 40 Diversified manufacturers Food retail food Automotive Confectionery 30 Railroad Diversified chemicals manufacturers Drugs Airlines 20 Telecom Automotive suppliers 10 Utilities Restaurant and fast food Insurance Pulp & Paper Banks 0 Time -10 -5 0 5 10 15 20 25 (Years) Source: Winning the Merger Endgame by Graeme Deans, Fritz Kroeger, and Stefan Zeisel: A.T. Kearney analysis Vision Hunters 9 Consolidation within Global Industries Defense electrical Tobacco Ship-building Aluminum producers 70% Integrated oil and gas Soft Drinks Truck and trailer manufacturers Automotive manufacturers Integrated steel producers 35% Drugs PulpPulp & & PaperPaper 30% Restaurant and fast food Railroad Food retail Utilities Diversified chemicals Airlines Telecom Insurance Banks Industry concentration, % 0 10 20 30 40 50 60 70 80 90 100 Source: Winning the Merger Endgame by Graeme Deans, Fritz Kroeger, and Stefan Zeisel: A.T. Kearney analysis Vision Hunters 10 Driver for Consolidation in the Pulp and Paper Industry is Shareholder Value RawRaw MaterialMaterial AvailabilityAvailability CompetitivenessCompetitiveness BalanceBalance SheetSheet vs.vs. CapitalCapital Intensity ofof GrowthGrowth ExpertiseExpertise Vision Hunters 11 M&As in the Pulp and Paper Industry Examples of Recent Major M&As Driver: Competitiveness Driver: Competitiveness Driver: Competitiveness Driver: Competitiveness Driver: Raw Material Driver: Competitiveness Driver: Raw Material Driver: Competitiveness Driver: Competitiveness Driver: Competitiveness and Expertise Driver: Competitiveness and Balance Sheet Source: Vision Hunters Vision Hunters 12 Consolidation in the Pulp and Paper Industry There is still room for consolidation in the pulp and paper industry Tissue TotalPaper Paper (1 Global Top 5 8.2 Mt 32% Global Top 5 38 Mt 19% China Top 5 5.3 Mt 43% China Top 5 4 9% North America Top 5 8.9 Mt 82% North America Top 5 17.5 Mt 49% Europe Top 5 7.8 Mt 66% Europe Top 5 25.3 Mt 45% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Fluff Dissolving Pulp Global Top 5 5.8 Mt 84% Global Top 5 4.1 Mt 50% China Top 5 1.3 Mt 92% Global Top 3 5.2 Mt 76% North America Top 5 1.4 Mt 100% North America Top 3 5.2 Mt 88% Europe Top 5 1.2 Mt 59% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% 1) Including all paper and paperboard Source: Vision Hunters, RISI Vision Hunters 13 Content 1. Global P&P Industry Consolidation 2. China Industry Restructuring 3. M&A Trends and Opportunities Vision Hunters 14 China has Led the Industry Growth Key drivers have been growth in China and in packaging and tissue grades Global Paper and Board Demand Growth Global Demand Growth by Grade Mt Mt 40 40 2009-2017 2009-2017 Packaging 47 Mt 2.2% pa 35 Mt 30 30 Packaging 20 20 21 Mt 28 Mt 26 Mt 3.6% pa 1.1% pa 10 10 Tissue Tissue Other 6 Mt 4 Mt 2 Mt Other 0 0 -16 Mt -10 -10 -15 Mt China Other (1 China Other (1 -20 -20 1) Including world total excluding China Source: Vision Hunters, RISI Vision Hunters 15 Asia Led by China Continues to Drive the Growth China continues to be the key driver for demand growth but with a decelerated pace Paper and Board Demand Growth Global Demand Growth by Grade Mt Mt 50 50 2017-2025 2017-2025 Packaging 40 40 41 Mt 35 Mt 30 1.4% pa 30 20 20 Packaging Other Tissue 10 10 9 Mt Tissue Other 2 Mt 7 Mt 1% pa 6 Mt 4 Mt 0 0 -16 Mt -7 Mt -10 -10 China Other China Other (1 -20 -20 1) Including world total excluding China Source: Vision Hunters, RISI Vision Hunters 16 Chinese Domestic Fiber Supply is Growing Slower Chinese fiber supply is limited and fiber furnish is converging towards virgin fiber Domestic Non Wood Pulp Domestic Wood Pulp Domestic RCF Mt Mt Mt 70 70 70 2017-2025 2017-2025 2017-2025 60 60 60 61 Mt 50 50 50 48 Mt 40 40 40 30 30 30 20 20 20 10 10 10 11 Mt 12 Mt 5.8 Mt 6.1 Mt 0 0 0 2017 2025 2017 2025 2017 2025 Source: Vision Hunters Vision Hunters 17 Increasing Share of Fiber is Imported Imports of all fiber grades, except recycled, have been increasing in China Waste Paper Imports Pulp Imports Wood Chip Imports Mt Mt Mt 30 30 30 30 Mt 25 26 Mt 25 26 Mt 25 20 20 20 21 Mt 15 15 15 13 Mt 12 Mt 10 10 10 11 Mt 7 Mt 5 5 5 0 Mt 0 0 0 2012 2017 2025 2012 2017 2025 2012 2017 2025 Source: Vision Hunters, RISI Vision Hunters 18 Chinese Industry Restructuring Change is driven by three key drivers Sustainability and Regulations • Capacity closures and Waste paper import ban relocations • Consolidation Environmental targets and emission reduction • M&A in packaging grades Change driven by urbanization Overcapacity in Many Grades • Grade change toward Low operating rates consumer grades and specialty paper grades Exits of uncompetitive capacity • M&A in specialty paper grades Shortage of Fiber RCF availability limited due to import ban • M&A in packaging grades Domestic pulpwood availability limited, production partly and pulp based on imported wood chips Vision Hunters 19 Recent Chinese M&A Activities Examples of Chinese FDIs in the pulp/fiber assets are mushrooming Pulp/Fiber Source: Vision Hunters, Publicly disclosed information Vision Hunters 20 Recent Chinese M&A Activities Examples Chinese FDIs in the paper assets have also been numerous Pulp/Fiber Paper Asset Source: Vision Hunters, Publicly disclosed information Vision Hunters 21 Chinese FDI in Pulp & Paper Chinese investments have targeted both green- and brownfield projects EXAMP. Transactions / Disclosed Investments 2017-2018 Acquisitions by Grade 2017-2018 Company Location Target Grade MUSD Mt APP* Brazil Eldorado BHKP 4 700 3 April Brazil Lwarcel BHKP 465 April Malaysia MNI Newsprint 16 2.8 Chentong Russia New mill BSKP 1 000 2.5 China 22MCC Russia Siberwood BSKP/DP 1 500 Hengan Finland Finnpulp BSKP 13.3 2.2 Lee & Man Vietnam New PM Linerboard NA 2 Nine Dragons USA OTM BHKP NA Nine Dragons USA Resolute RCP 55 1.5 Nine Dragons USA Catalyst Fine Paper 175 Nine Dragons USA Catalyst Fine Paper 175 Nine Dragons Vietnam New PM Linerboard NA 1 1.1 1.1 Shanying USA Verso Kraft Pulp 16 Shanying Holland WPT RCP NA 0.7 Shanying Finland New mill BSKP NA 0.5 Shanying Sweden Nordic Paper Packaging 280 Sun Paper USA New mill Fluff/DP 1 800 0.2 0 Sun Paper Laos New mill BHKP/DWP NA BHKP BSKP DP RCP Paper Packaging *minority shareholder Source: Vision Hunters, Publicly disclosed information Vision Hunters 22 Content 1. Global P&P Industry Consolidation 2. China Industry Restructuring 3. M&A Trends and Opportunities Vision Hunters 23 M&A Opportunities for Chinese Companies Acquisition targets vary by type and geography BSKP BHKP RCF Paper Source: Vision Hunters Vision Hunters 24 Vision Hunters has Broad Experience in M&A Examples of Past Projects in M&A Vision Hunters 25 Failure of M&A Failure of M&A is common leading to