China's Iron Lady

By Mark Rushton, Editor, Pulp & Paper International Magazine, RISI

Guangdong, China, Nov. 13, 2011 (RISI) - PPI was recently granted an audience with the enigmatic, charming and hugely successful Chairlady of Nine Dragons, Cheung Yan

There is an old English expression which says: "Where there is muck there's brass", well, with a couple of word changes and an upgrade of metals it could be said that: "Where there is wastepaper, there is pots of gold" especially in the case of Nine Dragons, and in particular in the case of the chairlady of the company, Cheung Yan. The Nine Dragons story is almost one of a fairytale, and is certainly one of the most amazing growth stories the pulp and paper industry has ever seen. Only starting out in paper and board production in 1995, the company has seen a phenomenal rise and is now the largest containerboard manufacturer in Asia, making it one of the leading players on the world market. It is also expanding into the recycled printings and writings market in China which is showing huge future potential.

But Cheung Yan actually started out in the wastepaper business originally, in the eighties when in her mid-twenties and with just $4,000. Initially starting out importing recovered paper from the US, she now presides over a business empire that - according to its latest annual report - turns over RMB 24,387 million ($3.8 billion), and has a workforce of over 17,000, has a capacity of more that 9 million tonnes, and is set to grow further. In fact, this year alone saw the start up of six new paper machines which will ramp capacity up to 11.45 million tonnes/yr, with the ultimate goal - present international market conditions allowing - to 15 million tonnes over the next few years.

Our interview with the chairlady took us to the top floor of Nine Dragons' Dongguan office building in Guangdong province, south east China, where Cheung Yan rules some of her empire from (there are other offices and other mills dotted around China, Hong Kong and Vietnam as well) and when you look over the sprawling production facility you suddenly realize just what those huge numbers mean. The Dongguan site evidently has the highest concentration of paper and board machines in the world - 15 at the last count - and the site produces close on half of the company's total production over an area of 2.4 km².

"We always follow where the market goes, we don't just expand because we want to," says Cheung Yan, Chairlady of Nine Dragons.

What are the drivers?

Clearly there is something special about this company and its founder, but what is the secret behind the phenomenal, unprecedented rise? Cheung is an incredibly engaging interviewee, open, humorous and frank and has an infectious enthusiasm that seems to rub off on all in her company. She says of Nine Dragons' business philosophy: "We all know that when operating in the board and paper making business it is not easy to be flexible, but the reason for our success is just that, we have been very good at spotting golden opportunities in the market and following them. We usually see these opportunities very early and act very quickly. Take for instance the last financial crisis, right in the middle of it in 2008, we ordered three new paper machines from Voith, which some industry onlookers were amazed by. But we saw the market trend and we knew that we could expand at the time without it being a risk.

"We always follow where the market goes, we don't just expand because we want to, the market demands that we follow and we have a good eye for the market, and a good hand to catch it and that is how we operate," adds Cheung.

But all this rapid expansion also leads to high debt, is this a worry for Nine Dragons? Cheung says: "Of course it is inevitable that you get high debt in this scenario, but if you don't expand, you don't grow and then you miss the opportunities, if you don't take them when they arise, they are gone. To take those opportunities, more capacity is needed, if we don't have growth, then what sort of company are we?"

China - a special economy

Imbued with this business philosophy of chasing the market, what is the feeling about a possible double dip recession, turmoil in the markets and customers beginning to struggle in the US and Europe at present? Cheung says: "It is true that this year the world might witness a double dip recession, particularly in the financial markets, and of course we have our eye on it, but papermaking is different from the financial sector where everyone is looking like they are in pain. The way I see it is we have 17,000 employees here, and we have to give them a very stable platform, with a share price that doesn't fluctuate too much. To do that we have to have growth. So again, we come back to the opportunities, for instance taking advantage of local growth, in different grades, and expanding into different regions of China".

"One of the areas we are successfully moving into is the printings and writings grades. We are well aware that in the US and Europe growth in these grades has all but come to a halt and it is a saturated market, but China is still developing and has a very special economy with the expectation that growth will occur in almost every industry," Cheung continues.

Nine Dragons now has two machines dedicated to the printings and writings market, PM 28 at the Dongguan site and PM 21 at the company's Taicang factory which is currently being upgraded. PM 28 is a Voith machine that was originally designed for making corrugated medium but has been rebuilt for making recycled papers. Cheung comments on the move into making printings and writings grades: "We have started out by making a 90% recycled based paper and our customers are already saying that they can't tell the difference between ours and paper made from virgin pulp, which is really good considering we are using no chemical whiteners in our production at all".

Nine Dragons clearly and obviously finds itself in a good position both in what it makes and in the region in which it operates.

The move into graphic and copy papers now sees Nine Dragons with a capacity of 450,000 tonnes/yr for the grades and entering what it sees as another growth area with huge potential. Cheung explains: "We are well aware that in regions like Europe, recycled papers are hugely popular, but in China it is a relatively new offering, and the population generally still associate paper production with polluting and deforestation. But this is changing rapidly as the message becomes clear that it is possible to use a paper that is recycled, and let's face it, this is where our core competence really lies and we have decades of experience with it. We are starting from scratch on environmentally friendly papers in China, and we are already the market leader in recycled paper here."

The graphic and copy paper produced by the company are sold under various brands, including Nine Dragons, Land Dragons and Sea Dragons, and are sold through the company's own sales channels, as well as through other larger partners.

Which leads perfectly onto the next question, the one of raw material procurement. How is Nine Dragons coping with what is often reported as near crisis levels of either the lack of quality recovered paper or ridiculous prices hikes of imported material? Cheung's answer is quite surprising: "Actually, we used to be heavily reliant upon imported recovered paper, which affected profit margins, particularly when the prices went up and we had to keep our own sales prices down. But more and more we are able to get raw material from the Chinese domestic market. What used to be just 10% has now increased to around 30% procured locally, and we can easily see it moving up to 40 or 50% in the next three or four years. The quality is also good as it tends to be paper that comes originally from virgin pulp and has not been recycled a number of times as is often the case with imported raw material".

Regional expansion, and perhaps abroad?

Nine Dragons clearly and obviously finds itself in a good position both in what it makes and in the region in which it operates. When it comes to containerboard, Cheung reckons that something like 40% goes for export, but the rest goes to large Chinese manufactures, so a large proportion is shipped out with final consumer products for export anyway, perhaps as much as 65%. So would she ever consider expanding into Europe or the US, and setting up shop with production facilities in those areas? Cheung replies: "Those foreign markets seem to have a good balance of supply and demand, so there would be no added value in entering those markets, so at the moment I would say certainly not, we have a fantastic potential right on our doorstep here, but in the long term future, perhaps.

"Our plans at the moment are to look closer to home, to the north east and south east of China. In the north east of the country the population and land mass are huge, and there is only 1 million tonnes/yr of production there. In the south east there are cities that have consumption of over 2 million tonnes/yr alone, and we feel we are in a position where we can never underestimate the future demand, so we will be closely following those markets."

Keeping awake at night

So what are the things that keep Cheung awake at night, the challenges, the worries, the world markets, a possible follow on global financial crisis? "Well, I believe if you can't sleep at night, then you haven't worked hard enough in the day!" comes the chairlady's characteristically robust and good humored answer. "But seriously, the financial crisis in 2008 saw our share price fall, but actually we made a very good profit in that year, proving that we have it right. We had already made the decision before the crisis that the raw material price was too high and that we wouldn't buy it.

"We have a policy here," concludes Cheung, "we don't allow the word "pressure" at Nine Dragons, we have a life attitude that says: "you know your house very well, and your family very well" so that you can be confident when a storm comes the house will hold up and that when the storm has receded that will leave you the opportunity of even better growth in the future".

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