The company released the first quarter report of 2023. The company achieved revenue of 1,625 billion yuan in 23Q1, -5.4% year on year, -26.02% month on month, net profit of 7.937,800 yuan, -79.24% year on year, -94.13% month on month, after deducting 7.1664 million yuan from non-Gummo, -79.3% year on year, -94.52% month on month.

Downstream stocking before moving to warehouses has slowed, and Q1 may be the lowest level for the whole year. Demand for high-grade coated white cards in Q1 is under pressure: the fourth quarter was the peak downstream stocking season for liquid packs and other food wrappers, so the company's revenue in the first quarter since it acquired Yuehua Bao was basically low for the whole year. In 2023, due to 1) the epidemic around the Spring Festival, 2) the slowdown in downstream preparation before warehouse removal, and 3) China Tobacco and Tobacco label revision work, demand for the company's 23Q1 orders for premium coated white cards weakened, and revenue was -5.4%/-26.02% year-on-year. Demand for high-end coated white cards is expected to pick up at an accelerated pace when downstream inventory is removed and cigarette card revisions are completed. Special paper is expected to perform steadily in 23Q1: the resumption of work and production in clothing and other industries, which were pressured by the previous epidemic, led to a recovery in demand for some specialty paper. The company raised the price of heat transfer paper (production capacity of about 60,000 tons, accounting for 7.6% of total production capacity) by 1,000 yuan/ton starting March 5, and the implementation situation is expected to be good.

The decline in pulp prices accelerated, and performance elasticity was gradually realized in Q2. The company's 23Q1 gross profit margin was 10%, year-on-year/month-on-month -4.54/-0.99pct, net interest rate 0.22%, year-on-year/month-on-month -3.9/-6.05pct. Starting in 22H2, the company's raw materials and energy costs climbed to a high level and continued to 23Q1. At the same time, the centralized investment of some expenses at the beginning of the year affected short-term profits (cost rate +3.4 pct month-on-month for the 23Q1 period). As overseas broadleaf pulp production capacity is intensively invested and supply is relaxed, broadleaf pulp has now entered a rapid decline channel, and the latest external market price has dropped to 550 US dollars/ton. Considering the shipping cycle and inventory consumption, it is expected that cost elasticity will be realized quarterly starting in 23Q2. Furthermore, the company mainly produces high-end, differentiated products. Under the direct sales model, product prices are relatively stable, and the rapid decline in costs will significantly increase profit margins.

Superior production capacity continues to increase to break through growth bottlenecks. The company currently has a production capacity of 600,000 tons of high-grade coated white card and 185,000 tons of special paper base paper. The 300,000 tons of high-grade coated white card and 60,000 tons of special paper under construction are expected to be put into production one after another in 24 years (at that time, the production capacity of raw paper was close to 1.15 million tons), reaching a 50%/32% increase in post-production capacity respectively, further breaking through the bottleneck of taking orders. Furthermore, the vertical industrial layout, such as chemicals and own pulp lines, continues to strengthen the chain and repair the chain. The company's net profit for 23-25 is estimated to be 514/647/718 million yuan (previous value: 577/656/716 million yuan) respectively, +32.8%, 25.8%, and 11% compared to the same period last year. The corresponding PE is 15.4X/12.2X/11X, maintaining the “buy” rating.

Risks suggest large fluctuations in raw material prices, falling short of expectations in production capacity, increased competition in the market, etc.