Performance summary: The company released its 2023 three-quarter report. In the first three quarters of 2023, the company achieved revenue of 990 million yuan, -13.6% year-on-year; realized net profit of 0.9 billion yuan, -31.1% of net profit; and realized net profit of 0.8 billion yuan, -10.6% year-on-year. Looking at a single quarter, 2023Q3 achieved revenue of 360 million yuan, -12.6% year-on-year; realized net profit of 0.4 billion yuan, or -31%; and realized net profit of 0.4 billion yuan after deducting non-return to mother, -9.5% year-on-year.

Benefiting from the decline in pulp prices and a marked improvement in gross margin, net interest after deducting non-net interest rates has steadily increased. During the reporting period, the company's overall gross margin was 16.4%, +3.3 pp year on year, and the single Q3 gross margin was 21.9%, +6.6 pp year on year. Thanks to the decline in procurement prices of raw materials such as wood pulp, gross margin has been significantly restored. In terms of cost ratio, the company's total expense ratio was 4.4%, +2.8pp, and sales expense rate/management expense rate/financial expense rate/R&D expense ratio were 1.9%/2.9%/-2.9%/-2.1%/1.8%, respectively, and +0.7 pp/+0.3 pp/+1.4 pp/+0.5 pp. The slight increase in the sales expense ratio was mainly due to an increase in marketing and promotion expenses. The increase in the financial expense ratio was mainly due to lower exchange earnings from exchange rate changes compared to the same period. In addition, the company's fair value change profit and loss for the first three quarters was -14.18 million yuan, a year-on-year decrease of about 42 million yuan. Taken together, in the first three quarters, the company's net interest rate after deduction was 8.5%, +0.3pp year on year, and the net interest rate for single Q3 was 11.4%, +0.4pp year on year. Actual profitability increased steadily. In addition, the company's net operating cash flow for the first three quarters of 2023 was 170 million yuan, +151.9% over the same period last year, and the cash flow was quite abundant.

Overseas customers are gradually coming to an end when they go to the warehouse, and orders during the Q4 sales season are expected to be repaired. Due to the early preparation of goods by downstream customers in 2022, the sales base and customer inventory levels were high, the company's revenue growth rate in the first three quarters was under pressure.

Among them, 2023H1's export revenue was 590 million yuan, -16.4% year-on-year, and Q3 revenue alone increased month-on-month in Q2. At present, most customers are nearing the end of inventory removal, returning to the normal pace of placing orders. Considering that Q4 is the peak season for overseas sales and downstream brands concentrate on order preparation, orders are expected to improve marginally.

The development of new customers continues to advance, and new products such as pet diapers and wet wipes have been recognized by customers. The company maintains a stable market share among old customers while continuously developing high-quality new customers at home and abroad. The new expansion of customers in 2023 is in the early trial production stage, and orders are expected to gradually increase. In addition, the construction of pet pads for the company's fund-raising project has been completed, and production capacity has been gradually released; non-woven fabric production lines were added in the first half of the year, and 2023H1 nonwovens contributed 28.25 million yuan in revenue, +47.9% over the same period last year. The increase in non-woven fabric production capacity is expected to help the company reduce its own production costs and make full use of scale advantages. At the same time, the foreign sales portion can contribute to revenue growth.

Profit forecasts and investment advice. The 2023-2025 EPS is expected to be 0.71 yuan, 0.88 yuan, and 1.04 yuan, respectively, and the corresponding PE is 22 times, 18 times, and 15 times, respectively. Maintain a “buy” rating.

Risk warning: the risk of increased competition in the industry; the risk of large fluctuations in raw material costs; the risk of repeated domestic and foreign epidemics; the risk that production capacity will not be released as expected.