The cost of pulp accounts for nearly half of the cost of household paper, which is still high. The cost of pulp occupies a high position in the cost composition of household paper business. Taking Vtech International as an example, according to our calculation, the cost of pulp will account for 51%~70% of the total cost of 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 company's gross profit rate, net interest rate performance showed reverse change relationship. We judge that there are two main effects: 1) the price of wood pulp has a certain periodicity; 2) Household paper is a 2C product with relatively stable terminal price.

In the past two years, the price of coniferous pulp dropped from 6795.9 yuan/ton to 4714.0 yuan/ton, a decrease of up to 30.6%. The price of broadleaf pulp dropped from 5726.9 yuan/ton to 3625.5 yuan/ton, a decrease of up to 36.7%. At the same time, in 2020, the gross profit margin of Vida International living paper business and Zhongshun Jierou reached 38.3% and 41.3%, respectively, increasing by 10.7pct and 7.2pct compared with 2018. By May 2021, the price of wood pulp continued to rise, reached a high and then fell in the second half of the year, which effectively reduced the cost burden of household paper business and had a good impact on the profit of paper enterprises.

In 2022, the new capacity of wood pulp is expected to be released, and the high price of pulp is expected to be loosened. New supply of wood pulp is expected to gradually come on stream. Global supply of wood pulp has remained relatively stable since 2012, but this pattern is expected to be broken in 2022, mainly due to a substantial increase in broadleaf pulp production capacity. Bracell in Brazil and MAPA in Arauco in Chile will be put into production by the end of 2021, with a combined capacity of 4.1 million tons/year. Uruguay's UPM will also be put into production in mid-2022, with a capacity of 2.1 million tons/year. As pulp and paper industry is an asset-heavy industry with a long period of capacity construction, once capacity construction starts, the sunk cost is high and it is "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 by 19% in 2025. The output of coniferous pulp is expected to grow steadily, with an annual growth rate of less than 1% from 2020 to 2025, mainly because no new devices have been installed and the old devices are nearing full production. It is estimated that the operating rate of softwood pulp installed devices will be nearly 92% in 2022.

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