1、GlobalResearch9 January2019EquitiesGlobal Env. Svcs., Paper, & Basic Materials UBS Analyst Call: China Recycling Restrictions Takeaways & TranscriptEquitiesWe hosted a UBS Analyst call for a global view on China recycling restrictions On 4 January 2019 we hosted a call with Jon Windham, Wenzhuo Du,

2、Andreas Bokkenheuser, and Marcio Farid to provide an update on the impacts of Chinas ongoing ban on imports of recycled materials. Below we present our key takeaways fromthecall.Foracopyoftheslidesthataccompanythiscall,pleasesee HYPERLINK /shared/d2R1M0pFA8WbJEW here.Environmental Services sector ke

3、y takeawaysWe are now beyond the trough y/y financial impact of recycled commodity price declines for Municipal Solid Waste (MSW) earnings. We expect efforts to mitigatethe financial impact to provide modest tailwind to 2019 earnings growth. This tailwind, coupled with stable price/volume growth and

4、 the rollover impact of larger 2018 M&A activity will drive MSW EBITDA/sh growth to accelerate to 10% in 2019E from 6% in 2018. Of the MSW stocks WCN and ADSW are the least exposed to recycling at just 2% and 1% of 2018E revenue, respectively. Waste Connections (WCN) remains our top-pick in the spac

5、e due to acquisition driven growth that should outpace the peer group.Broadly,weexpectstrongorganicvolumeandpricinggrowthacrosstheMSW spacein2019.Detailed2019guidanceexpectedon4Q18earningscallsinFebruary.China Paper sector key takeawaysChinas paper sector is gradually shifting to oversupply given: 1

6、) weaker demand as Chinas economy slows along with poorer procurement sentiment; and 2) around 4.5mtpa of net containerboard capacity additions in 2019, including 2.05mtpa from NDP, which could account for 7.9% of total capacity by end-2018E.Basic Materials sector key takeawaysDespiteearlyexpectatio

7、nsthatChinesepackagingproducerswouldbeforcedtoswitch from recycled to virgin fiber buying post import bans on the former, this has not meaningfully materialized. Packaging producers cite a switch to virgin fiber is a loss- makingtransaction,whichhasproducersincreasingdomesticrecycledpapercollection

8、andimportsoffinishedpackagingpaper.ContinuouslyrisingpulpinventoriesinChina andEuroperepresentsarisktothemarketperceptionofatightpulpmarketin2019.General Industrial ServicesNorth AmericaJon Windham,CFAGeneral Industrial ServicesNorth America HYPERLINK mailto:jon.windham +1-617-478-4711WenzhuoDu HYPE

9、RLINK mailto:wenzhuo.du wenzhuo.du+86-213-8668960AndreasBokkenheuser HYPERLINK mailto:andreas.bokkenheuser +1-212-7139516MarcioFarid HYPERLINK mailto:marcio.farid +55-11-35136543Daniel Ford,CFA HYPERLINK mailto:dan.ford +1-212-713-2224William Grippin, CFA HYPERLINK mailto:william.grippin +1-617-4784

10、740 HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 18. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the

11、 firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Key conference call sector takeawaysNorth America Environmental ServicesWe are now beyond the trough y/y financial

12、 impact of recycled commodity price declines.Exportedwastepapervolumeshavereturnedtonormalizedlevels,with the decline in exports to China being absorbed primarily by India, Indonesia, and Vietnam. We expect efforts to mitigate the financial impact including adding fees and introducing risk sharing m

13、echanisms to contracts to provide modest tailwind to 2019 earnings growth. This tailwind, coupled with stable price/volume growth andtherolloverimpactoflarger2018M&AactivitywilldriveEBITDA/shgrowthto accelerate to 10% in 2019 from 6% in 2018.China Paper: shifting to oversupplyChinas paper sector is

14、gradually shifting to oversupply given: 1) weakerdemand as Chinas economy slows along with poorer procurement sentiment; and 2) around 4.5mtpa of net containerboard capacity additions in 2019E, including 2.05mtpafromNDPbasedonourestimate,whichcouldaccountfor7.9%oftotal capacitybyend-2018E.Wenowexpec

15、tChinasoverall2018/2019containerboard utilization rate to soften from 92% in 2017 to 88%/85%.Chinagovernmentreducedrecoveredpaperimportlicensesby35%in2018,and recovered paper imports were down by 40%. Asian countries and India took advantageoflowpricedrecoveredpapervolumesleftbyChinabuyerstoproduce

16、containerboard and ship to China. However, Chinese demand has been under pressure recently, mostly due to China-US trade war and overall economic slowdown.Asaconsequence,containerboardimportpricesandvolumeshavealso beenunderpressure.Andwedonotexpectamaterialimprovementatleastuntil the end of Chinese

17、 New Year (mid-February). For 2019, it is unclear what will be the total recovered paper import licenses issued by the government, but market expects to be lower than 2018. In this scenario, China will likely be increasingly dependent on containerboard imports.PulpLocal (Brazilian) investors are rel

18、atively more bullish on pulp versusinternational investors. This is partly attributable to the formers slightly longer investment horizon (into H219-2020) in anticipation of a tighter pulp market by that time. International investors are taking a shorter term view into H119 citing risk of seasonal d

19、emand weakness and further pricepressure.No signs of a recycled-to-virgin fiber switchDespite early expectations that Chinese packaging producers would be forcedto switchfromrecycledtovirginfiberbuyingpostimportbansontheformer,thishas notmeaningfullymaterialized.Packagingproducersciteaswitchtovirgin

20、fiberisa loss-makingtransaction,whichhasproducersincreasingdomesticrecycledpaper collectionandimportsoffinishedpackagingpaper.Hencethepulppricerallyover the past 12 months was largely driven by an abnormal amount of supply disruptions.ThelatterhasstartednormalizingwhichcoupledwithChinesepaper demand

21、weaknessandrisinginventoriesisdrivingdownpulpprices.Inventory growth risk to tight 2019 pulp marketContinuously rising pulp inventories in China and Europe represents a risk to the market perception of a tight pulp market in 2019. At the current pace, the H119 pulpmarketwillbeinsurpluswhileanongoing

22、tradewarcouldweighondemand in H219 as well. In that scenario, we still expect the 2020 pulp market to grow tighter, but likely on the other side of an earnings downgradecycle.We present below a transcript of our recent UBS Analyst Call with Jon Windham, Wenzhuo Du, Andreas Bokkenheuser, and Marcio F

23、arid. We have edited the transcript below for clarity. Minor grammatical changes that do not impact the meaning of content have been applied.UBSModerator: Jon Windham January 4, 20199:00 am ETJonWelcome, everybody, to todays call with UBS Global Research Analysts on the impacts of Chinas recycled im

24、port restrictions. This is Jon Windham. I head up Alternative Energy Environmental Services Equity Research for UBS including the municipal solid waste names which were impacted by the price decline in recycled materials in 2018. Im joined today by Winzhuo, whos the lead China Paper and Basic Materi

25、als Research Analyst for UBS; as well as Andreas, whos the head of Americas Mining and Basic Material Research; and Marcio, UBS Americas Mining and Basic Materials ResearchAnalyst.Just some quick logistics before we get started. The format of todays call will be some introductory comments from each

26、of the analysts followed by a Q&A. Bella, the operator, will provide instructions on logging any questions from participants after the presentation. I do encourage you to ask a question on the call, or as always you can email me or any of the other analysts questions during thecall.Second, there are

27、 slides to accompany todays discussion. They were distributed via email to pre-registered participants about 30 minutes ago. If you need a copy, you can email either myself or Will Grippin. Williams email address is HYPERLINK mailto:william.grippin william.grippin. With that, lets get started. Ill b

28、e referring to the page numbers as we go. Well get started on slide 1, which has all the contact information for any of the analysts if you want to send a question or want some follow-up information after thecall.To get it started well skip forward to slide 3 and try and set the stage here a little

29、bit. On the top left is a chart that shows the decline in waste paper and OCC or cardboard recycled material prices since January 2015. You can obviously see the precipitous decline that happened really during most of 2017. On the top right, you can actually see the quarterly impact of the year-on-y

30、ear price change on a per-ton basis. This is really to highlight that really were past post-trough impact in terms of recycled materials prices impact on year-on-year declines. They really sort of troughed in the second and third quarter of 2018.Then the table at the bottom shows the year-on-year ch

31、ange in recycling revenue contribution to total revenue for the municipal solid waste names. Our forecast going forward basically you can see here basically assumes that prices hold pretty close to where they are today. You can see the overall impact or headwind on a year-on-year basis really starts

32、 to mitigate starting with the fourth quarter of 2018 and theres really not a headwind in 2019, which well talk in a minute about some of the implications that means to EBITDA and earnings growth for these companies next year.A couple things to comment just about the fundamentals and whats happening

33、 in the US market, a lot of the municipal solid waste companies have taken steps to mitigate the impact on their financials from these declining prices. The first thing theyve really done is a big effort to clean up the recycling stream in an effort to reduce sorting costs. This is really largely do

34、ne through pushing back on customers to sort at the point of generation.So in the United States historically theres been a real problem in my opinion or an issue for the collection firms particularly on the residential side, the residential customers do tend to kind of use the recycling bin as just

35、another trash bin. Certainly at my own house and pretty much everyone Ive talked to collection companies in the United States are now opening the recycling bins, having a look inside, and if theres a lot of trash in there they will leave it and leave you a note that says “Heres whats recyclable, eve

36、rything else goes in the trash.” Thats really an effort to reduce the sorting costs given that revenue has declined in the recycling business for the municipal solid waste companies. This is an effort to reduce the sorting costs by starting off with a cleaner stream.The second thing that the municip

37、al solid waste companies have done in the United States is really start to move and raise recycling sorting fees for third-partycollection firms. The larger integrated municipal solid waste companies, which are the ones listed in the United States, tend to be the owners of the recycling sorting faci

38、lities, and where theyre able to, they can actually raise prices to offset the price decline on third-party collection companies.Then lastly something thats really been happening for a year now is municipal solid waste companies really going out and talking to their customers, largely large municipa

39、lities on a risk-sharing pricing mechanism. That is a charge for recycling collection to the customers that moves inversely to the resale value of recyclable materials. This transition can take time. Often residential or municipals contracts in the United States are ten years long, but the early ind

40、ications are that the publicly traded companies and the comments they have made is that there has been a positive response from themunicipalities.Ultimately, if you have recycling in your town in the United States, its a town that wants recycling, and therefore is looking for mechanisms in which rec

41、ycling works economically for everyone. So all three of those mitigation factors actually turn into modest tailwinds for earnings growth for these companies in 2019 in my opinion. Turning to slide 4.Just some quick comments on trade flows to give you a sense of whats happened and how maybe things ha

42、ve stabilized at least recently in terms of volumes at least. On the top right here, we actually saw the three months ending October 2016 in millions of tons of US exports of waste paper and OCC. You can see the bridge of how we got from where we were two years ago to the three months ending October

43、 2018, and its basically to show a large decline in US recyclable exports to China being mitigated primarily by India, Indonesia, and Vietnam. The two charts on the bottom just give a little bit more detail on how weve seen a shift in the destination for US recycled material exports. Turning to slid

44、e5.Just two quick charts here on the right. Its meant to show you that while total US volume exports of waste paper did go negative really since 2017, weve recently seen a recovery in the total volume of exports as new-end markets have expanded following the trade flow disruption caused by the Chine

45、se policy change. On the bottom right, you can really see the reversal in total volume exports. As you can see, theres been a slight recovery really over the last year to basically more normalized levels of exports. Moving on to slide 6. Lets talk a little bit about the fundamental impacts that recy

46、cling has had and then what its likely to have next year.The three charts here are to show the year-on-year revenue bridge from 2017 to 2018. While recycling was a significant revenue headwind in 2018, it was overwhelmed by strong late-cycle volume and pricing growth in the industry. Importantly, gi

47、ven the stabilization in recycling prices, we expect EBITDA per share growth in the municipal solid waste space to accelerate from an average of 6% in 2018 to 10% year-on- year growth in 2019. Thats boosted not only by the removal of the recycling headwind but also strong organic price and volumegro

48、wth.In addition, 2018 was a very active year in M&A for the industry which has a nice contribution in 2019. Maybe to put a bullet on it about how were thinking about this, in a world where certainly the market would tell you people are very concerned about a slowing economy, in 2019 given the delaye

49、d impact from actual economic activity to actual volumes in municipal solid waste which can be more than a year oftentimes, we feel very comfortable sitting here today in January of 2019 that youre actually going to have accelerating EBITDA per share growth for all the municipal solid waste names re

50、ally in 2019 which makes them a very attractive safe haven sector in my opinion for investors where you have both the defensive characteristics as well as accelerating growth in 2019. Turning to the next two slides, slide 7, I wont spend much time on this just given the nature of this call and in th

51、e macro topic, but our top pick in this space is waste connections.Theres some details there on connections on slide 7. Happy to talk about that offline if anyones interested in getting more details on specific names. Then lastly on slide 8, this has been a topic that me and the other analysts here

52、I forget I think we did the first call on this it might have been back in March or June and weve done sort of regular updates. I really feel we have sort of a good body of work on tracking whats been happening in recycling, and theres some links to some of those reports here and some more detailed r

53、eports on the individual names just for yourreference.With that, I will turn it to slide 9 and turn it over to Winzhuo.WinzhuoThanks, Jon. Hello, everyone. Thanks for your time for the call. This is Winzhuo, the China paper sector analyst. On page 9, you can find my contactinformation.On page 10, th

54、is is our chart for the China containerboard paper sector supply and demand. We are forecasting decline in demand growth in 2019 and 2020 because of the macroeconomy slowing down, and were projecting around a 2% year-on-year growth for 2019 to2020.For supply, based on our bottoms up supply calculati

55、on, we are projecting around 8% supply new additions in 2019 and around 2% in 2020, which will lead to oversupply. Turn to page 11. Were now expecting Chinas overall containerboard utilization ratio to soften from 92% in 2017 to 88% and 85% in 2018 and2019.On page 12, we have the details for capacit

56、y additions in 2018 to 2020. On page 13, were talking about the total import OCC quotas and the way we remain positive on the industrial consolidation because we are seeing more import OCC quotas to leading companies, and the companies that receive the quota are shrinking from around 150 in 2016 and

57、 2017 to around 64 companiesin2018.On page 14, we have more details for the companies who received the recovered paper per quota. In 2018, the total quota was 18 million tons to 64 paper producers, with 34% going to Nine Dragons Paper and 15% to Lee & Man Paper. So its around 30% for Nine Dragons an

58、d 13.8% for Lee & Man in2017.On the bottom right is the market share of 2018. On the bottom right is the first batch of recovered paper in 2019. On page 15, we just wanted to give more color on the import quota offerings. We are seeing less recovered paper quota to most of the paper producers. Nine

59、Dragons and Lee & Man Paper are gaining more market share, but they are still losing importquotas.This is my part. I will pass the call to Andreas and let him talk on the paper sector.AndreasThanks, Winzhuo. Im just going to briefly give a little bit of feedback from market conversations weve had wi

60、th investors internationally as well as locally, and then Ill pass it over to Marcio, who some of you might know just came back from two months in Asia meeting with tissue producers, paper producers, pulp producers and so on and so forth. Hes going to give a little bit more clarity and color on loca