Event: Zhongshun Jierou released its 2023 three-quarter report. 2023Q1-3 achieved operating income of 6.823 billion yuan, an increase of 11.60% year on year; net profit of 165 million yuan, a decrease of 39.74% year on year; net profit after deduction of 142 million yuan, a year-on-year decrease of 43.21%.
Among them, in 2023Q3, the company achieved operating income of 2.138 billion yuan, an increase of 22.44% over the previous year; net profit of 81 million yuan, an increase of 72.69% over the previous year; net profit after deduction of net profit of 69 million yuan, an increase of 128.32% over the previous year.
Revenue growth accelerated in 23Q3, and continued recovery can be expected during the 23Q4 peak season
In 23Q3, the company achieved revenue of 2.138 billion yuan, a year-on-year increase of 22.44%. The growth rate increased month-on-month, mainly due to the low base due to the adjustment of dealer channels last year and the gradual recovery in terminal consumer demand this year. The company continues to optimize the channel structure and continue to expand the channel development efforts, 1) Improve the channel network. The company expanded from a single dealer channel before 2015 to the current development model of GT (traditional dealer channel), KA (large chain store channel), AFH (commercial consumer goods channel), EC (e-commerce channel), and RC (new retail channel), which guarantees the company's level of competition; 2) Expanding channel development efforts. While ensuring the smooth operation of other channels, the company has formed a professional e-commerce operation team to increase resource investment in e-commerce platforms, and Build and strengthen the corresponding supply chain system to strengthen daily operation management; long-term strategic cooperation has now been reached with mainstream and well-known platforms in the market; 3) Continuously optimize the category structure, and define high-end, high-margin non-traditional dry towels as a strategic category for future development. By increasing the terminal promotion of high-end and high-margin products such as oil paintings, Koi, Face, Manners, and health products, precise brand marketing strategies combined with multi-channel sales layout, enhance the distribution and penetration of high-end and high-margin products, drive continuous growth in the sales share of high-end and high-margin products, and steadily increase the company's gross margin and profitability. With the advent of the golden period of 23Q4 “Double Eleven” and “Double 12” e-commerce channels, the company's revenue can be expected to grow steadily.
Profitability 23Q3 has unleashed profitability elasticity. 23Q4 is expected to continue to repair profitability in terms of profitability. The 23Q3 company's gross profit margin was 34.04%, an increase of 2.57 pct over the previous year, mainly due to lower raw material costs and a further increase in the company's share of high-end products. According to Wind data, the average price of coniferous pulp/broadleaf pulp in the 23Q2 external market was 711/537 US dollars/ton, respectively, down 29.33%/35.27% from the previous year. In April '23, pulp prices continued to decline, and paper mills continued to consume high-priced pulp. 23H1's raw material inventory book balance fell from 1,120 billion yuan at the beginning of the period to 498 million yuan, and external pulp prices fell to a historic low of 475 US dollars/ton at the end of May. Our analysis determined that paper mills began to replenish raw material stocks. According to our analysis of the company's raw material inventory of 498 million yuan at the end of June '23, we estimate that the number of days in raw material inventory is about 1.3 months. We analyzed that 23Q2's low-cost pulp was reflected in the company's costs in 23Q3. According to Wind data, the average price of coniferous pulp/broadleaf pulp in the 23Q3 external market was 680/533 US dollars/ton, respectively, down 30.57%/38.77% year on year, and 23Q4 profitability is expected to recover year on year.
In terms of period expenses, the company's period expense ratio in 23Q3 was 29.92%, up 0.71 pct year on year; sales/management/development/finance expense ratio was 20.92%/6.05%/3.02%/-0.05%, respectively, +0.51/-0.39pct year on year. Among them, the 23Q3 company's management and R&D expenses increased year-on-year, mainly due to increased incentive costs. The company continues to reduce costs and increase efficiency, improve informatization and data construction, establish driven financial management, supply chain management systems and efficient procurement systems, and comprehensively improve the level of refined management. Under the overall influence, the net interest rate of 23Q1-3 companies was 2.41%, down 2.07pct year on year. Among them, the net interest rate of 23Q3 companies was 3.78%, up 1.12pct year on year.
Investment advice: As a leading household paper leader, the company continuously optimizes product and channel structures, and equity incentives further stimulate organizational vitality. The decline in pulp prices is expected to release profit elasticity. We expect that Zhongshun Jierou's 2023-2025 revenue will be 95.90, 107.80, and 120.18 billion yuan, up 11.91%, 11.48% year on year; net profit of 3.68, 5.37, and 786 billion yuan, up 5.21%, 45.83%, and 46.44% year on year. The corresponding PE is 39.1x, 26.8x, 18.3x, giving a target price of 12.42 yuan, maintaining the buy-A investment rating.
Risk warning: the risk of increased competition in the industry; the risk of fluctuations in raw material prices; the risk of repeated outbreaks.