Performance review
1H22's performance is below our and market expectations.
The company announced 1H22 results: the company achieved revenue of HK $15.3 billion, + 0.6% compared with the same period last year, and its net profit was HK $797 million,-59% compared with the same period last year, corresponding to HK $18.46 per share, which was lower than our and market expectations, mainly due to relatively weak demand and high costs in the first half of the year. Comments: 1) demand performance is weak, sales decline slightly: domestic demand is relatively weak in the first half of the year, the company's sales volume is slightly-4% to 2.9 million tons compared with the same period last year; 2) the product price and net profit per ton of paper are all weak: national waste, energy and transportation costs are all at an all-time high in the first half of the year. Supported by upstream costs, the company's selling price is + 5% year-on-year to 5161 Hong Kong dollars / ton, but still decreased by ~ 3%. During the reporting period, the upstream major raw materials, energy and transportation costs were all at an all-time high, resulting in significant pressure on the company's profit per ton of paper, which was 24% to HK $291 per ton compared with the same period last year / month-55% respectively, which was the lowest in the past five years. 3) the expense rate has declined steadily, and the net debt ratio is still controllable: 1H22's sales expense rate and management expense rate are year-on-year-0.3ppt,-0.9ppt to 2.9% and 3.9%, and the net debt ratio is slightly + 4.4ppt to 45.6%, which is still within the controllable range. 4) the dividend ratio remains high: the company pays an interim dividend of HK6.5 cents, with a dividend ratio of + 1.5ppt to 35% compared with the same period last year.
Trend of development
Pay attention to the expected valuation repair opportunities for the peak season. We believe that the current profit of packaging paper and household paper has reached the bottom of history, small and medium-sized factories are generally facing losses, the marginal contraction of industry supply, and the concentration of leaders is expected to accelerate concentration. According to the paper industry news Jiulong, Liwen, Shanying and other leaders recently announced the August-September downtime maintenance plan, affecting production capacity of more than 500000 tons, we believe that if the above paper mill downtime maintenance landing, industry inventory continues to be removed, when the September packaging paper season is approaching, the company is expected to usher in a valuation repair opportunity.
Speed up the layout of upstream high-quality fiber raw materials and Southeast Asian bases, and the cost advantage is expected to deepen. 1) Packaging paper: according to the company announcement, the company expects to set up a new packaging paper pulp production line in Chongqing / Jiangxi in 2023, we think that if the production can be successfully landed, this will help the company to control the raw materials of medium-and high-end packaging paper and optimize the company's product structure; the company has now built overseas production capacity in Vietnam, Malaysia and other places, and the company announced that it intends to expand the regional base construction in Cambodia and continue to accelerate the international layout. 2) Sanitary paper: the company's sanitary paper production capacity is close to 1 million tons, and the company announced that it plans to put 300000 tons of bleached wood pulp production line at the end of next year. We believe that before 1Q23, with the release of overseas Arauco and UPM of 3.66 million tons of broad-leaved pulp, and overseas demand does not rule out the risk of decline, we think that pulp prices are expected to reach a downward inflection point by the end of this year, when the company's high-ton pulp consumption sanitary paper sector is expected to show better performance elasticity. In the medium term, with the improvement of the pulp matching rate of the company, the cost-side advantage of the company is expected to deepen, and the periodic fluctuation of toilet paper plate is also expected to be stabilized.
Profit forecast and valuation
Taking into account the continuation of cost-side repression, we downgrade the company's profit margin assumption and reduce 2022 earnings by 58% to HK $2.1 billion, and introduce a 2023e profit forecast of HK $3.4 billion, with the current share price corresponding to 2022-2023e Pmax E being 6.3x, 3.9x; we maintain a neutral rating and downgrade the target price by 51% to HK $3.60, corresponding to 2022-2023e Pmax E is 7.5x, 4.6x, implying 18% upside space.
Risk.
Pulp and energy prices fluctuate more than expected; downstream demand is less than expected risk; new capacity is higher than expected.