The company released the third quarter report of 2023: 2023Q1-3 achieved revenue of 6.62 billion yuan (year-on-year + 3.1%), net profit of 116 million yuan (- 75.5%), and non-return net profit of 65 million yuan (- 85.0%). Q3 realized income of 1.924 billion yuan (year-on-year-24.8%), net profit of 13.17 million yuan (year-on-year-92.4%, month-on-month-14.6%), deducting non-return net profit of 9.89 million yuan (year-on-year-93.7%). The average price of Q3 paper decreased and the cost improvement lagged behind. Profit performance is still under pressure.

Papermaking: price increase gradually landed, low-cost pulp into the warehouse, Q4 profit is expected to repair. Q3 lagged behind the pace of raw material procurement and consumption, and the cost improvement was weak; from July to August, the downstream demand was weak, and the market prices of Q3 double adhesive tape / coated paper were 3% and 2% respectively compared with the same period last year. The company's paper profit has not been significantly improved. With the gradual consumption of low-priced pulp, the cost pressure of Q4 is expected to be alleviated, and the downstream demand has recovered and the price increase has gradually landed since September. As of mid-October, the price of double adhesive tape / coated paper is 15% higher than the previous low + 13%. We expect the company's profits to recover. In addition, the company is currently building 450000 tons of uncoated cultural paper and rebuilding 200,000 tons of chemical pulp, and the new production capacity is expected to be put into production in 2024, which is expected to contribute to the increase.

CCER transaction entered the countdown, forestry carbon sequestration volume can be expected. Since September, the "measures for the Management of Voluntary greenhouse Gas Emission reduction Trading (trial)" and the first batch of CCER methodologies (afforestation carbon sequestration, grid-connected photothermal power generation, grid-connected offshore wind power generation, mangrove construction) have been promulgated one after another, and the CCER approval and trading system will be restarted soon. The new afforestation methodology determined that the entry threshold was still high, the company laid out forestry carbon sequestration in advance and had technical and resource advantages, and had made full preparations for the preparation of PDD documents for contracted projects, and it was expected that the CCER window could be gradually submitted for approval after opening.

Up to now, the company has signed a formal development contract area of nearly 40 million mu (including 3.06 million mu of farmland carbon sequestration), and the development area of the first phase is 3.41 million mu, which is expected to reach 50 million mu by the end of 2025. We expect forestry carbon sequestration to continue to contribute to performance increment.

Q3 profit is under pressure, looking forward to Q4 quarter-on-quarter repair. 2023Q3's gross profit margin is 5.02% (year-on-year-10.5pct, month-on-3.6pct), sales / management / R & D expense rates are 1.47%, 2.71%, 1.20%, respectively (year-on-year + 0.3pct/+0.1pct/-2.2pct), and homing net profit is 0.68% (year-on-year-6.1pct, month-on-0.02pct).

Q3 company papermaking cost improvement lag and downstream demand weak drag on profitability, Q4 is expected to repair.

The expenditure of raw material purchase affects the cash flow and improves the operating capacity. 2023Q1-3's operating cash flow is 146 million yuan (year-on-year-131 million yuan), mainly due to increased expenditure on raw materials such as pulp board and coal; by the end of Q3, the company's inventory turnover days were 313 days (year-on-year-45 days), accounts receivable turnover days were 28 days (year-on-7 days), accounts payable turnover days were 67 days (year-on-year-11 days), and operating capacity was improved with high inventory consumption of raw materials.

Profit forecast and investment rating: the company's forestry carbon sequestration business builds barriers based on multiple advantages of technical team, background and resources, which is expected to contribute to performance increment after CCER restart; Q4 pulp and paper main industry profit is expected to be repaired. We expect the company's homing net profit from 2023 to 2025 to be 72pm, 80pm, 970m respectively, corresponding to 16X/14X/12X for PE, maintaining a "buy" rating.

Risk hint: the cost fluctuates more than expected, the CCER restart policy is lower than expected, and the new capacity is lower than expected.