The era of major mergers and acquisitions has arrived.

Recent months have seen a flurry of activity in corporate mergers and acquisitions. The new "Nine Policies" set forth at the beginning of this year have strategically positioned the market for active mergers and restructuring, signaling many favorable conditions for businesses. In September, the issuer, the China Securities Regulatory Commission (CSRC), announced the "Six Guidelines for Mergers," further fueling the enthusiasm in the merger and acquisition market, with over 260 listed companies already disclosing restructuring matters.

"Merger and restructuring can make enterprises bigger and stronger," noted Wu Xiaoqiu, director of the National Finance Research Institute at Renmin University of China. "The structure of China's listed companies must be adjusted; traditional industries' share is too high, and their valuations remain relatively low. We must change this."

Under dual pressures from economic conditions and increasing market competition, traditional industries must adapt to the new requirements for economic development. Whether through strategic alliances or complementary acquisitions, this is undoubtedly a valuable opportunity for growth for traditional businesses.

Good assets are in demand; recently, Hengfeng Paper's territory welcomed a new friend — Jinfeng Paper. Through this dynamic development in the traditional industry, we can glimpse how they embrace change, optimize structures, and enhance international competitiveness.

The Merger of Cigarette Paper Companies

From a consumer perspective, the demand for tobacco is inelastic. China has a massive base of smokers, making it the largest cigarette market globally. A look at the rapid development of the tobacco industry reveals that it has always relied on technological advancement and product upgrade.

It is often joked that the most expensive part of a pack of cigarettes is the packaging. Among these, the paper that wraps the tobacco has its own technical intricacies; it is a type of specialty industrial paper, and its production processes and quality standards far exceed those of regular writing paper. It must facilitate combustion yet also resist it, while minimizing the pungent taste from the combustion of paper.

Hengfeng Paper is a leading company in the cigarette paper sector. Recently, they announced that the company is planning to issue shares to acquire 100% of Sichuan Jinfeng Paper Co., Ltd., revealing the transaction proposal on the evening of November 28.

As a key player in the specialty paper manufacturing field, Hengfeng Paper's acquisition plan of Jinfeng Paper becomes a landmark case in the industry, potentially tied to the sector's unique characteristics.

Hengfeng Paper stated that this transaction is not expected to constitute a major asset restructuring but is an associated transaction that will not lead to a change in the actual controller of the company.

How will a cigarette paper company from Northeast China merge with a cigarette paper company in Sichuan to achieve industrial chain extension and integration?

Let's first look at Hengfeng Paper based in Northeast China. Mudanjiang Hengfeng Paper Co., Ltd. is designated as a manufacturing base for cigarette auxiliary materials by the State Tobacco Monopoly Administration, primarily engaged in the production and sales of specialty paper and pulp, with tobacco industry paper as its main product.

Hengfeng Paper was listed on the Shanghai Stock Exchange in 2001. Throughout its development, the company has focused on regional diversification. It established Hubei Hengfeng Paper Co., Ltd. (majority controlled by Hengfeng) as early as 2005.

To strengthen its competitiveness in the specialty paper sector, Hengfeng Paper is constantly on the move, like investing 338 million yuan in a new project that produces 40,000 tons of green low-grammage specialty coated paper yearly, expected to begin trial production by the year's end.

In fact, the production concentrations of domestic branded cigarette companies are distributed across different regions, which corresponds to a relatively scattered positioning of cigarette paper manufacturing companies nationwide. Currently, leading industry players are mainly located in Heilongjiang, Zhejiang, Guangdong, Yunnan, and Sichuan.

Moreover, the production of cigarette paper requires permits granted by the National Tobacco Monopoly Administration, which are not concentrated in any specific area, allowing qualifying enterprises to gain production qualifications and develop across various locations, leading to a more dispersed company distribution.

If the paper manufacturers are closer to the cigarette production enterprises, they can provide better production services, meet market demands promptly, and facilitate cooperation with upstream and downstream businesses, lowering communication costs.

As a key player within the industry, if Hengfeng Paper can bridge Northeast and Sichuan, it might significantly enhance market coverage while improving market competitiveness — to grow "big," it also needs to grow "strong."

Therefore, Hengfeng is eyeing the "king of cigarette paper" in Sichuan.

Founded in 1990, Jinfeng Paper is one of the key enterprises in Chengdu's Wenshu District printing and textile industry. Its main business closely aligns with Hengfeng's — the production and processing of cigarette paper and supporting cigarette paper, as well as industrial paper.

Jinfeng Paper has enjoyed a glorious period of development, at one point capturing 25% of China's cigarette paper market, being one of the "Five Flowers" in the cigarette paper market. Many domestic tobacco factories, including Chengdu Tobacco Factory and Shifang Tobacco Factory, have Jinfeng’s name on their supply chains for A-grade cigarette papers, indicating its deep-rooted presence locally.

Breaking Through Current Bottlenecks

Mergers and acquisitions serve as a key means for corporate financing and market integration. If this acquisition goes smoothly, the benefits to Hengfeng Paper are nearly self-evident.

These benefits can be simplified into three dimensions.

First, in recent years, Hengfeng Paper has been committed to enhancing its competitiveness in the specialty paper realm, seeking to overcome production capacity bottlenecks.

From the equipment perspective, Jinfeng Paper boasts four production lines for specialty cigarette paper, with a complete supporting structure. In recent years, it has vigorously advanced smart renovations, and after a complete overhaul, its total production capacity is expected to reach 50,000 tons. According to the transaction proposal released by Hengfeng Paper, Jinfeng Paper generated operating income of 83.10 million yuan and net profit of 5.98 million yuan in the first ten months of 2024, indicating a continuous recovery in its overall operational performance.

The transaction proposal indicates that with the increasing demand from downstream clients, Hengfeng Paper's production capacity has been running at a high load for an extended period, recording an overall capacity utilization rate of 91.56% in 2023, making it challenging to meet the surge in market demand effectively. Following two rounds of capacity expansion projects and the recent investment in constructing a 22nd production line, there are currently no new lands available for construction within or around Hengfeng's factory; additionally, the paper manufacturing facilities are insufficient for the new capacity required. After acquiring Jinfeng Paper, Hengfeng's annual production capacity will swiftly increase from 270,000 tons to 320,000 tons, potentially breaking through existing capacity bottlenecks.

It is foreseeable that through this acquisition, Hengfeng Paper can achieve resource integration and complementary advantages, further solidifying its market-leading position, ensuring that the strong remain strong.

Secondly, Hengfeng Paper can optimize its industrial layout through this merger, effectively reducing critical costs.

On one hand, there is the cost of logistics; Jinfeng Paper is positioned advantageously geographically, being near the top five provinces in cigarette production, including Yunnan, Hunan, Henan, Hubei, and Guangdong.

For Hengfeng Paper, located in Northeast China, filling this geographical void can directly enhance logistics efficiency and lower costs.

On the other hand, and quite crucially, Chengdu features a national-level logistics hub for the China-Europe Railway Express, facilitating convenient export transportation. With Hengfeng Paper's overseas operations rapidly expanding in recent years, Jinfeng Paper's advantageous geographic location can significantly lower shipping costs to countries in Europe, Southeast Asia, etc., effectively addressing the cost disadvantages posed by long transportation distances for overseas clients.

Hengfeng Paper asserted that based on the profound industrial synergy between the listed company and the target company, this transaction could help the listed company enhance its production capacity, regional layout, and product structure, fortifying its supply chain while strengthening competitiveness, pushing the formation of a dual-base industrial platform operating in synergy between the north and south.

Evidently, this meticulously planned strategic decision for the merger, if successful, will enable Hengfeng Paper to quickly boost its production capacity, breaking through existing limitations and enhancing its international trade advantages, further expanding its scale in the fiercely competitive paper industry.

The Industry Needs Change

Indeed, following the announcement of Hengfeng Paper's acquisition of Jinfeng Paper, many industry insiders have been discussing the implications of this move for the industry.

The integration and transformation of the cigarette paper supply industry has become a trend, which is especially vital in the current global economic landscape. Enterprises today face multiple challenges such as supply chain shifts, changing market demands, and rising costs.

Hengfeng Paper's acquisition of Jinfeng Paper not only addresses the needs of its own development but also serves as a crucial element in optimizing the structure of the entire industry, enhancing resource allocation efficiency and invigorating market vitality.

As an important tool for capital markets to serve the real economy, the significance of mergers is paramount, affecting the new round of reforms and developments within China's capital markets. The state places a high level of importance on the role of mergers and restructuring in promoting high-quality development — technology innovation and industrial adjustment are key goals, emphasizing new productive capabilities and industrial integration.

Hengfeng Paper has stated that mergers and restructures within the paper industry are beneficial for small and medium-sized paper companies to leverage the leading advantages of large enterprise groups in areas such as smart manufacturing, cost management, and client resources, enhancing modernization, digitalization, and smart development levels in the paper business, thereby pushing the industry towards a spatial pattern of complementary advantages and collaborative development, aligning with national strategies to accelerate industrial structure adjustments and upgrades, eliminating outdated production capacity, and improving quality capacity development.

In terms of technological innovation within the paper-making sector, leading enterprises have always played a significant role in setting standards. Large cigarette paper businesses push continuous technological innovation, demonstrating and leading the industry towards advancements.

The cigarette paper industry has considerable entry barriers; focusing on main businesses and fostering strong collaborations represents an optimal pathway. This approach not only enriches the overall competitiveness of China's cigarette paper industry but also creates a better external environment for the growth of enterprises themselves.

Data shows that in 2023, Hengfeng Paper achieved a sale of 203,700 tons of mechanical paper, reflecting a year-on-year increase of 0.31%. The domestic market, international market, and new product market accounted for 56.66%, 26.52%, and 16.82% of total sales, respectively.

Currently, as global industrial transformations accelerate, building a world-class specialty paper enterprise group to participate in international market competition requires companies to actively implement a “going global” strategy, guided by market demand to develop new core competitive capacities.