New High-Grade Cigarette Paper Producer Goes into Operation in China

Source from:  Securities Times newspaper 09/09/2008

A new high-grade cigarette paper production line went into operation in south Central China's Hunan Province on August 20, further exacerbating the intense competition within the cigarette paper manufacturing sector that is already suffering from a surplus of the annual production capacity. The new high-grade cigarette paper production line at Xiangfeng Special Paper Co., Ltd. in Longhui City of Hunan Province is the first ever high-grade cigarette paper production line installed in Hunan, with an annual production capacity of 8,000 tons. With a total investment of 300 million yuan (43 million U.S. dollars), the installation of this production line is one of the 73 priority projects intended to support the development of western parts of Hunan Province. In response, the two existing heavyweights of the cigarette paper manufacturing sector in China - Hengfeng Paper Co. in northeast China's Heilongjiang Province and Minfeng Special Paper Co. in east China's Zhejiang Province - have both said that they will manage to alleviate the pressure of competition through continued efforts of technical upgrade and management improvement. For Minfeng and Hengfeng - both listed companies, their cigarette paper products respectively account for 40.8 percent and 57.6 percent of their output and respectively represent 52.8 percent and 85.2 percent of their gross profits. Once their business of cigarette paper production is relatively gravely impacted, both companies will see their operation performance seriously affected. In a recent interview with the Securities Times newspaper of China, Zheng Jian, an aide to the president of the Board of Directors of Minfeng, admitted that the entry into operation of the new cigarette paper production line in Hunan will indeed cast impacts on Minfeng. The supply of cigarette paper at the marketplace has exceeded demand for quite a long period of time, and new production lines have been installed one after another in the country over the past two years. To deal with such a situation, Minfeng has been striving to improve its service and reduce the cost of production and marketing, according to Zheng. It was reported that cigarette paper making enterprises have accounted for a relatively small proportion of the papermaking industry in China. Therefore, only a relatively small number of enterprises granted the license for the production of tobacco monopolies by the State Tobacco Monopoly Administration (STMA) have the right to produce cigarette paper in China. "Although there are certain standards for access to the cigarette paper manufacturing sector, there are only 15 enterprises in China licensed to produce cigarette paper. However, after a series of corporate mergers and acquisitions as well as enlargement of the annual production capacity, there is still the situation of supply exceeding demand," Zheng said. In a separate interview with the Securities Times newspaper, Wang Guodong with the Securities Department of Hengfeng said: "For quite a long period of time, we have been accustomed to the intense competition at the marketplace of cigarette paper." Annually, the market demand for the supply of cigarette paper in China stands at some 100,000 tons while the annual cigarette paper production capacity of China has reached some 200,000 tons, according to Wang. "Under such a circumstance, what we can do is just to let the fittest survive and phase out inferior ones. Because of this reason, all manufacturers are making a shift onto the production of high-grade cigarette paper. We have to strengthen our core competitiveness through improvement of product quality and marketing channels," he said. Meanwhile, there are sources with the tobacco industry who say that the cigarette paper manufacturing sector is relatively highly prosperous, and that the market demand for the supply of high-grade cigarette paper in China remains high. The biannual reports of both Hengfeng and Minfeng indicate that the two companies were in a favorable trend of development in the first half of 2008. In particular, the Hengfeng generated 559 million yuan (79.8 million U.S. dollars) in operating income in the first half of 2008, up 31 percent year-on-year, with the amount of net profits reaching 25.81 million yuan (3.68 million U.S. dollars), up 54 percent year-on-year. Experts with the tobacco industry have pointed out that Hengfeng, as the largest cigarette paper manufacturer in China taking one-fourth of the total domestic market shares, will be able to accelerate the process of improving its management and operation and upgrading its technologies, and further sharpen its competitive edge, after entry into cooperation with foreign strategic investors. Enditem