The company released its 2023 semi-annual report: 2023H1 realized income of 3.449 billion yuan (year-on-year), net profit of-50 million yuan (year-on-year-133.7%), non-return net profit of-60 million yuan (year-on-year-141.2%) Single Q2 realized income of 1.823 billion yuan (year-on-year), net profit of-58 million yuan (year-on-year-152.4%), and non-return net profit of-67 million yuan (year-on-year-160.5%). Profitability pressure is mainly due to the average price down-the cost is still high, according to our estimates, Q2 white card is expected to drop more than 500 yuan / ton, special paper is expected to drop more than 1000 yuan / ton.

White card order repair, special-self-adhesive production and sales boom. According to our estimates, the company's Q2 sales volume is about 220000 tons (month-on-month ratio + 50,000 tons), of which white card sales are expected to be about 150000 tons (month-on-month ratio + 44000 tons) and special paper (including self-adhesive) about 70,000 tons (month-on-month ratio + 6000 tons). The production and sales of special paper maintain the boom, and white cards benefit from cigarette label revision, order repair, and liquid package volume expansion to achieve steady repair.

The vertical and horizontal layout of the industrial chain, the medium-term growth path is clear. At present, the company has a white card production capacity of 600000 tons and special paper of 270000 tons. Looking forward to 2024, 300000 tons of food cards and 60,000 tons of thermal transfer printing are expected to gradually contribute to the increment, and the company has included 612000 tons of newly increased machine pulp production capacity. After putting into production, it is expected to smoothly weaken the impact of the cycle, the growth path is clear. In addition, the company is still launching cross-border products such as medical film coatings, digital hot stamping films and reverse osmosis membrane substrates. At present, the company actively cooperates with industry leaders and research institutes to effectively cover ecological and environmental protection, new energy and other strategic emerging industries, and is expected to continue to contribute to revenue and profit increment in the future.

Profitability is under short-term pressure, and H2 is expected to be repaired gradually. 2023H1 gross margin is 6.1% (year-10.0pct), net margin is-1.5% (year-5.4pct); single Q2 gross margin is 2.7% (year-14.8pct), net margin is-3.2% (year-8.5pct). Looking to the future, with the gradual storage of low-cost broad-leaf pulp, the cost of Q3 is expected to be improved, while the storage of low-cost mechanical pulp (with a longer purchasing cycle) is expected to contribute to the continuous repair of Q4 cost. In addition, some paper companies have issued food cards, hot transfer and other price letters, the overall price is expected to slow down H2, profits are expected to repair. In terms of cost performance, the expense rate during the single Q2 period is 9.8% (year-on-year + 2.2pct), of which the sales / management / R & D / financial expense rate is 1.1% + 0pct/+0.7pct/+1.5pct/+0.05pct, respectively. The increase in the R & D expense rate is mainly due to the company's continuous increase in R & D investment as a demonstration enterprise in science reform.

The improvement of cash flow ring ratio and the mismatch of production and sales led to the increase of inventory goods. 2023H1 net operating cash flow is-340 million yuan (year-on-year-950 million yuan), single Q2 is 244 million yuan (year-on-year-48 million yuan). In terms of operating capacity, as of 2023H1, the turnover days of accounts receivable, accounts payable and inventory were 47.49days (+ 8.31days), 42.28days (+ 1.07days) and 67.04days (+ 13.13days) respectively.

Profit forecast: the company's net profit from 2023 to 2025 is expected to be 380 million yuan, 500 million yuan and 590 million yuan respectively, corresponding to PE 17.5X, 13.4X, 11.2X, maintaining the "buy" rating.

Risk tip: costs fluctuate more than expected and downstream demand recovery is less than expected.