The metal packaging industry has undergone significant challenges over the past few years, marked by an expansion of production capacity that has not translated into higher profitsThe willingness within the industry to continue expanding production has noticeably decreasedAs the construction of production capacity reaches its peak, and mergers and acquisitions among leading companies advance, along with a decline in raw material prices, there is hope for a sustained recovery of profit margins within the metal packaging sector.

In the first half of 2024, the metal packaging company Orijin reported revenues of 7.206 billion yuan, reflecting a modest increase of 1.14% year-on-yearIts net profit attributable to shareholders rose by 18.39% to 548 million yuan, while the adjusted net profit increased by 21.71% to 529 million yuan

Conversely, Shengxing Cosaw a revenue decline of 3.67% year-on-year, culminating in total revenues of 3.221 billion yuanHowever, it still managed a remarkable 47.85% increase in net profit, reaching 234 million yuan, with a 41.83% rise to an adjusted net profit of 221 million yuan.

Despite a generally weak consumer demand affecting overall revenue growth for these companies, improvements in profitability can be attributed to the drop in raw material prices and optimized capacity layoutFor instance, Orijin's gross margin stood at 17.82% in the first half of 2024, marking an increase of 1.88 percentage points compared to the previous year, largely driven by falling raw material costsThe average price of tinplate saw a decrease of 4.7% year-on-year, trading at 6,546 yuan per ton, while aluminum prices dropped from a peak of 24,240 yuan per ton in 2021 to 19,695 yuan in September 2024.

As industry capacity construction approaches completion, and major companies continue to consolidate and merge, there is optimism for continued profit margin recovery, with an industry turning point potentially on the horizon.

Capacity expansion is nearing its end.

The high homogenization of metal can products means that the operational performance of companies is highly sensitive to overall supply and demand levels within the industry

• Signs of Economic Slowdown in the UK
• Increased Uncertainty in Global Capital Markets
• Surge in U.S. Bond Yields
• Reflections on Stock Valuation
• Is the January Effect in the Stock Market Real?

According to a report by Guojin Securities, the domestic metal packaging industry entered a phase of rapid investment expansion around 2011, enhancing production and sales scalesDuring the period from 2016 to 2021, with the injection of production capacity into the industry, companies recorded substantial revenue growth; for instance, Orijin achieved an average annual revenue growth rate of approximately 12.9%, while Shengxing noted around 19.1%. However, this intense release of capacity ultimately led to oversupply conditions, resulting in a downward trend in both revenue and profit margins, evident by Orijin's net profit margin declining from 15.17% in 2016 to 5.34% in 2023, and Shengxing's margin dropping from 8.03% to 4.72% during the same periodBy 2021, demand growth slowed, and intensifying competition sparked a price war, leading to a steep decline in the growth rates of revenue across the industry, marking a transition from a phase of expansion to one of maturity.

The profit margins of companies within the sector fell significantly amidst intense competition and an overall trend of pressure on free cash flow

Given the ample construction of production capacity, there has been a notable decrease in the willingness of companies to proceed with expansionIn 2023, capital expenditure in the Chinese metal packaging industry plummeted to 11.6%, marking the lowest level on record, and further dropped to 4.0% in the first half of 2024.

Guojin Securities posits that as capacity construction nears completion and consolidation among major companies progresses, an oligopoly structure will emerge, potentially leading to profit margin recoveryAlthough the continued release of existing capacity led to a decline in profit margins from 2020 to 2022, signs of easing competition and convergence of marginal new capacity are becoming apparent, paving the way for an approaching profit turnaroundIn 2023, the profit margin for metal packaging companies reportedly improved to 4.8%, up by 0.7 percentage points from the previous year.

Recently, ongoing mergers and acquisitions involving major companies will further alleviate competition and push profit margins upwards.

The industry's consolidation is on the rise.

In 2023, the total operating income for large-scale enterprises in China's metal packaging industry reached 150.562 billion yuan, which accounted for approximately 13% of the total value of the packaging industry, significantly lower than the global average of 45%-50%.

The two-piece and three-piece beverage can segments dominate the market

Currently, the supply and demand for three-piece cans are nearly balanced, with a reported production of about 31.05 billion cans in 2022 against a demand of approximately 30.53 billion cansThe established relationship between major beverage companies and their suppliers ensures stability among the leading metal packaging firmsConsequently, the average factory price for three-piece can manufacturers has witnessed a stable upward trend in recent years.

On the other hand, the demand for two-piece cans has been enhanced by the increasing canning rate of beer — reported at around 27% in China in 2022, significantly lower than the over 60% canning rate observed in developed countries such as the United States, United Kingdom, and JapanHowever, with continuous capacity increases leading to oversupply, the balance between supply and demand has been profoundly affected

Forecasts by Huafu Securities indicate that the annual production capacity for the two-piece can industry approaches 70 billion cans, while demand is estimated to be just over 50 billion cansDespite foreign withdrawal from the sector and the beginning of consolidation, the oversupply situation has yet to improve, leading to fierce competition and weakened pricing power, especially in light of the substantial cost increases associated with aluminum prices, thereby constricting profit margins for two-piece cansHuafu Securities noted that if the industry concentration continues to rise and leading companies achieve market share through mergers and acquisitions, the anticipated strengthening of pricing power could rapidly manifest, thus optimizing supply-demand dynamics and improving profitability.

Orijin has announced a major asset purchase proposal to acquire all outstanding shares of COFCO Packaging, publicly listed on the Hong Kong Stock Exchange, at an offer price of 7.21 Hong Kong dollars per share

This offer is conditional and aims to acquire up to 75.56% of COFCO Packaging shares, with a total transaction cap of 6.066 billion Hong Kong dollars, approximately 5.524 billion yuan.

On the same day, COFCO Packaging released a statement indicating that, considering irrevocable letters of commitment, the offeror, Champion HOLDING (BVI) CO., LTD, has received acceptances amounting to a total of 345 million shares, representing about 30.9% of COFCO Packaging’s total issued sharesHowever, due to the acceptance conditions not being met, the offer has lapsed.

Champion HOLDING (BVI) CO., LTD is wholly owned by Zhangping Industrial, with shares held by Baowu Group and Guoxin Investment at 61.54% and 38.46%, respectivelyBaowu Group is the parent company of Baosteel Packaging

The offer to acquire stems from a privatization plan disclosed by COFCO Packaging on December 6, 2023. Baowu Group intends to proceed with a proposed acquisition at 6.87 Hong Kong dollars per share, which necessitates various regulatory approvals and requires that accepted shares reach a minimum threshold of 50% of total sharesAdditionally, an irrevocable commitment was made by COFCO Packaging's controlling shareholder, China Food, to accept the takeover offer.

With the recent failure of Baowu Group's offer, attention now turns to Orijin and the progress of its approval processOrijin's proposed pricing for COFCO Packaging is approximately 5% higher than that of Baowu Group.

Zhejiang Securities emphasizes that if the acquisition materializes, the competitive landscape of the two-piece can sector will significantly improve

COFCO Packaging is a core leader in China's two-piece can market, having reported revenues of 10.28 billion yuan and a net profit of 475 million yuan in 2023, with a stable gross margin of 15.64% and a net margin of 4.72%. Overall, regardless of whether Baowu Group or Orijin successfully acquires COFCO Packaging, the industry's consolidation will enhance concentration.

The Chinese metal packaging industry has undergone multiple rounds of mergers and integrations, with Shengxing Cohaving acquired Pacific China and Bode Technology, COFCO Packaging acquiring Jihong Packaging and Chengdu Gaosen, and Orijin acquiring Beer Asia Pacific and taking a stake in COFCO PackagingWith continual mergers at the helm, market concentration for China's two-piece can segment has reached high levels; according to publicly disclosed capacity data, the market share of the top four producers in 2023 has increased to 75%, with Baosteel Packaging, Orijin, COFCO Packaging, and Shengxing owning capacity shares of 23%, 20%, 17%, and 15%, respectively.

Looking at the American packaging industry, leading firms have experienced acceleration in growth and profitability following mergers and consolidations

According to Huafu Securities, during the initial phase of consolidation (1990-2000), Crown acquired multiple entities within the food metal packaging and plastics sectorsIn the second phase (2000-2016), Ball ramped up its acquisition pace, focusing primarily on aluminum can companies across various regionsBetween 2016 and 2023, Ball recorded an average annual revenue growth rate of 6.4%, exceeding its previous 4%, while Crown maintained a faster average growth of 5.5%, compared to the earlier trend of 2%. Additionally, benefiting from industry integration, the operating profit margin for Crown during the first consolidation phase rose from 8% to 10%, while Ball’s operating profit margin increased from 6% to 9% during the second integration phase.

In particular, Ball has recently stabilized its gross and net margins around 20% and 5%, respectively

In 2023, Ball's revenue from beverage packaging reached 11.32 billion dollars, boasting a gross margin of 19.0% and a net margin of 5.1%, with a return on equity (ROE) of 19%. In contrast, domestic metal packaging leaders exhibit ROE rates ranging from 6% to 11%, indicating substantial room for improvement when compared to Ball's performance.

Huafu Securities underscores that, following the initial integration phase from 2016 to 2019, China's two-piece can industry gradually shaped a competitive landscape dominated by four main players: Baosteel Packaging, Orijin, COFCO Packaging, and ShengxingHowever, the market shares among these competitors remain close, and should the acquisition involving COFCO Packaging finalize, the industry dynamics would be clearer, elevating the leading players' influence and fostering profit growth