Performance review

The net profit of 2Q23 is lower than our and market expectations.

The company announced 1H23 results: revenue of 3.45 billion yuan,-10% year-on-year; net profit of-50.32 million yuan,-134% year-on-year; of which the net profit of single 2Q23 was-58.26 million yuan, year-on-year / month-on-month changed from positive to negative, and the quarterly performance was lower than our and market expectations, mainly due to weak demand for white cards and a higher-than-expected price decline. Comments: 1) the price of white card fell more than expected, and the price of heat transfer base paper was adjusted centrally: due to the weak supply and demand plus the rapid decline of cost pulp, the price of white cardboard 2Q23 continued to decline from the previous month (we estimate that the price per ton decreased by more than 500yuan); due to the intensification of competition in the industry and the rapid cost decline, the price of thermal transfer paper fell by more than 2000 yuan / ton in the second quarter, and the overall single ton special paper dropped by ~ 1000 yuan. 2) Special paper sales are stable, cigarette card shipment repair: 1Q23 due to cigarette label QR code revision, the company cigarette card sales slightly decline, 2Q23 cigarette card shipments have been repaired; special paper shipments are stable month-on-month, we estimate that 2Q23 white card + special paper sales ~ 200000 tons, sales increase 20% + 3) the slow-release pace of cost is slower than market expectations: considering that the company is still consuming high-priced pulp in the second quarter, the slow-release pace of cost is lower than expected, the profit margin of scissors has not been realized as scheduled, and the profit margin of weak paper is weaker than the previous month. 4) more exchange gains, negative financial expenses: due to the appreciation of the US dollar and the company's adjustment of foreign currency asset structure, the larger exchange gains led to the decrease of 1H23 financial expenses to-9.29 million yuan; 5) short-term pressure on cash flow: the net cash flow of 1H23 operations turned negative to-340 million yuan compared with the same period last year, mainly due to the impact of inventory; 1H23 asset-liability ratio is 36%.

Trend of development

Large buybacks boosted market confidence, and 2H23 profit elasticity was gradually verified. The company announced that it intends to use the company's own funds to buy back 200 million yuan to 400 million yuan of shares (the price of the shares to be repurchased does not exceed 5 yuan), all the repurchased shares will be cancelled, and large buybacks will boost market confidence; at the same time, the dividend rate of the company will be as high as 119% in 2022. High dividend performance also provides solid support. Looking back, with the company began to use low-cost pulp, while the current low paper prices are limited (some special paper leaders have recently released price increase letters), the company scissors profit elasticity may gradually appear in the second half of the year.

In 2024, we will enter the year of production expansion, and we will tamp the cost advantage with chemical pulp. The company steadily promotes the base layout of Donghai Island in Zhanjiang. 1) quantity: 300000 tons of white cards + 60,000 tons of special paper, paper making increased by 40% compared with the end of 2022. 2) Price: we believe that the new white cards mainly anchor food cards that are still in the growth lane. At the same time, the company extends the coating technology to film-based new materials, endogenous growth worry-free, look forward to extension expectations gradually clear, medium-term prices and profits increase ample space. 3) benefits: we estimate that some of the company's chemical pulp (~ 400000 tons) is expected to land in 2025, when the company's food card machine pulp self-sufficiency rate is expected to increase from the current 0% to 100%, which is conducive to tamping the cost advantage and strengthening the profitability of blockbuster products.

Profit forecast and valuation

Taking into account the pressure on the white cardboard price and profit margin, we cut the net profit for 2023-24 by 28%, 11% to 332 million yuan and 495 million yuan, and the current price corresponds to 20x and 13x corresponding to 2023-24e Pmax E; we maintain our outperforming industry rating, taking into account the valuation rotation to 2024. we cut the target price by 10% to 4.7 yuan, and the target price corresponds to 26x, 18x for 2023-24e Pamp E, implying 32% upside space.

Risk

Weak demand exceeded expectations; new white card supply released more than expected; costs fluctuated more than expected.