1H22's performance is in line with the forecast; the contradiction between supply and demand has not yet been resolved, and the low valuation attribute has shown that Liwen Paper has released a semi-annual report, recording a net profit of HK $797 million, down 58.8% from the same period last year, in line with its performance forecast issued on July 25. The interim dividend yield is stable at 35% (1H21VR 34%). The slowdown in economic growth and the impact of the epidemic posed challenges to industry supply and demand, resulting in a 3.6 per cent year-on-year drop in sales to 2.92 million tons and a year-on-year net profit of HK $358 / ton to HK $292 / ton. While we have seen a slight improvement in industry profit margins since late July, given that demand is expected to recover only slightly in the second half of the year but supply is accelerating, we think it is too early to judge the inflection point. We believe that Liwen's healthy balance sheet and continuous cost control will help it survive the industry's downward cycle smoothly. We maintain the target price of HK $6.00, based on 0.8 times the 2022-2023 average PB, which is 1 standard deviation less than the average of the stock since 2010, mainly due to the challenges of supply and demand in the packaging paper industry. At present, the valuation is relatively cheap, maintaining the "buy"

Rating. Maintain the annual EPS forecast of HK $0.41 in 22-23-24.

Profits in the packaging paper sector were hit, while profits in the household paper sector rebounded and profits in the packaging paper business were hit hard in the first half, with net profit contribution falling 67.4 per cent year-on-year to HK $602 million and sales down 3.2 per cent year-on-year to 2.66 million tons. The average sales price rose 3.9% year-on-year to HK $4902 / tonne, but the cost rose sharply due to inflation, resulting in a year-on-year decline in net profit per tonne of HK $445 / tonne to HK $226,000 / tonne. The profitability of the household paper business has improved, with the sector's net profit contribution up 53.2% year-on-year to HK $233 million, mainly due to a year-on-year increase in net profit of HK $356 / tonne to HK $903 / tonne. The high selling price of household paper (the average sales price rose 7.3% to HK $7779 / tonne) was more than offset by the increase in costs during the period.

Profit margin pressure alleviates in the short term, but it is difficult to see the inflection point.

Since late July, we have seen an improvement in supply and demand in the industry, and factory inventories have begun to decline (but the end of July is still 85% higher than the same period last year). At the same time, profit margin pressure has temporarily eased, mainly because raw material prices have fallen more than paper prices, which we believe is due to the increase in paper makers' downtime in the past few weeks and better seasonality as the Mid-Autumn Festival approaches. Taking into account the downturn in the domestic real estate industry, flagging consumer confidence, and overseas demand may face greater challenges, we believe that the packaging paper industry demand may only recover slightly. At the same time, we expect that the supply of packaging paper industry is expected to accelerate (2H22 forecast: 4.9 million tons vs 1H22:170 10,000 tons). Therefore, we think it is too early to judge the inflection point of the packaging paper industry.

Risk hint: the real estate policy tightened more than expected, and the epidemic was closed for longer than expected.