2023H1 achieved revenue of 12.20 billion yuan, +9.0% year-on-year, of which the tissue/sanitary napkin/diaper business revenue was +22.7%/+2.9%/+5.0%. Excluding exchange rate effects, 2023H1 net profit was -14.4% year-on-year. Looking ahead to 2023H2, with the use of low-cost wood pulp and an increase in the share of high-end products, the company's profit is expected to continue to recover.

Revenue growth exceeded expectations, continuing high dividends. 2023H1 achieved revenue of 12.20 billion yuan, +9.0% year on year, net profit attributable to parent company of 1.23 billion yuan, -4.0% YoY, corresponding net interest rate of 10.04%, year-on-year/month-on-month -1.35/+4.36pcts. After deducting exchange losses, 2023H1 achieved net profit attributable to the parent company of 1.41 billion yuan, -14.4% year-on-year, corresponding net interest rate of about 11.5%, year-on-year/month-on-month -3/+1 pct. The company announced that it would pay an interim dividend of 0.7 yuan per share, totaling 8.1 billion yuan, with a corresponding dividend rate of 66%.

Tissue business: Volume growth is driving impressive revenue growth, and profits are expected to improve quarter by quarter. The 2023H1 tissue business achieved revenue of 7.17 billion yuan, +22.7% year-on-year. According to our estimates, volume: sales increased 20% + year over year, which is the main driving force for revenue growth; price: benefiting from product structure optimization (increased share of wet wipes and cloud skin softening series, etc.), driving ASP to increase single digits year over year. The company promoted product structure optimization. Revenue from 2023H1 Cloud Skin Toner and Wet Wipes increased by 40% + and 18.9%, respectively, and revenue accounted for 12% +/ 6.9% of the tissue business (vs. 10% +/ 7% in 2022). Affected by the fact that high-priced pulp stocks are still being consumed (according to our estimates, 202H1/2023H1, the average cost of using the company's wood pulp is about 500 US dollars/700 US dollars/ton), the gross profit margin of the 2023H1 tissue business was 17.7%/0.1%, year-on-year -5.4/-5.2 pcts; 2023Q2, benefiting from falling pulp prices, the dividends of falling pulp prices gradually became apparent (according to our estimates, the average cost of using the company's wood pulp fell back to 500 to 550 US dollars/ton in June 2023). 20% +. Looking ahead to 2023H2, we expect the price of pulp to still fluctuate around the current price. Considering the company's current wood pulp storage level (about 3 months), and as the company gradually starts using lower-priced wood pulp, the profit level of the tissue business is expected to improve quarterly in the second half of the year.

Sanitary napkins and diapers: Revenue growth is improving, and the product structure continues to be optimized. Sanitary napkins: The 2023H1 sanitary napkin business achieved revenue of 3.22 billion yuan, +2.9% over the same period last year. Affected by high inventory and stocking of core raw materials such as fluff pulp at the beginning of the year, the gross margine/operating profit margin of 2023H1 sanitary napkins was 61.8%/35.7%, year-on-year, -3.5/-6.8 pcts; with the use of low-cost raw materials, the gross margin of 2023Q2 increased to nearly 65%. The company launched the “Tianshan Cotton Series” sanitary napkins made from Xueshan long-staple cotton, and upgraded and iterated products under the main brand “Seven Degrees Space”. Revenue from the 2023H1 pant series increased 80% + over the same period last year. Diapers: The 2023H1 diaper business achieved revenue of 670 million yuan, +5.0% year-on-year. Among them, high-end diapers “Q·MO” /adult diapers earned +19.1%/+45.1%, accounting for 35% +/ 29.2% of diaper revenue (vs. 30% +/ 23.7% for the whole year 2022). The increase in high-end share relieved cost pressure. The gross margine/operating margin of the 2023H1 diaper business was 36.0%/4.5%, +0.7/-11.5 pcts over the previous year. Looking ahead to 2023H2, with the decline in raw material prices and product structure optimization, the profitability of sanitary napkins and diapers is expected to improve month-on-month.

The share of e-commerce continues to rise, and product promotion expenses have been increased to enhance the brand image. After the company's new president took office, he focused on omni-channel coordination efforts. Online channels: 2023H1. Revenue from e-commerce channels (including retail channels and new channels) was 35.+ billion yuan, up 30% + year on year, accounting for nearly 29.0% of revenue, and +4.8 pcts of revenue. Among them, revenue from other new sales channels (including retail channels and community group buying, etc.) increased 30% + year on year, with revenue accounting for 7% +. According to our estimates, electronic commerce for tissues, sanitary napkins, and diapers accounts for 33%/25%/50% + (vs. the whole year 2022, 34%/20%/60%). Offline channels: 2023H1 traditional channel revenue increased 20% + year over year. The company has set up a sales management department to strengthen channel control capabilities (such as setting minimum product sales prices within different channels, etc.), and increase penalties for smuggling dealers. On the cost side, 2023H1 sales and management expenses totaled 2.56 billion yuan, +19.8% year on year, cost rate 21.0% year on year, +1.9 pcts. The cost increase was mainly due to: 1) brand promotion expenses +330 million yuan year on year, mainly used to enhance brand image and expand new retail channels; 2) transportation expenses +60 million yuan year on year, mainly due to the rapid development of new retail channels.

Risk factors: The decline in raw material costs fell short of expectations; the company's new product sales and channel expansion fell short of expectations; industry competition intensified; downstream demand recovery fell short of expectations.

Profit forecast, valuation and rating: Based on the company's performance in the first half of the year, considering the rapid increase in the company's household paper business revenue, the company's revenue forecast for 2023-2025 was raised to 24.14 billion/25.28 billion/26.45 billion yuan (the original forecast was 23.84 billion/24.92 billion/26.0.1 billion yuan). The digestion of high-priced wood pulp stocks is slower than expected, and industry competition has intensified. We slightly lowered the company's net profit forecast for 2023-2025 to 2.56 billion/2.67 billion/2.68 billion yuan (the original forecast was 2.62 billion/2.74 billion/2.87 billion yuan), corresponding to the 2023-2025 EPS forecast of 2.20/2.30/2.31 yuan (the original forecast was 2.25/2.36/2.47 yuan). Referring to 13 to 29 times PE in the tissue and personal care industry, the company was given 13 times PE in 2023, with a target price of HK$31, maintaining the “increase in weight” rating.