The company expects net profit of 0.95 to 143 million yuan in 2023

The company forecast net profit for 2023 was 0.95 to 143 million yuan, and 2022 was -2256 million yuan, turning a loss into a profit; the corresponding profit forecast for 4Q23 was 235 million yuan; net profit deducted from mother in 2023 was -350 to -250 million yuan, corresponding to the 4Q23 net profit deducted from non-return mother was 59 million yuan. Overall, 2023 fell short of our expectations and the market, mainly due to slow demand recovery and the impact on imported paper supply exceeding expectations.

Key points of interest

Prices improved slightly in the fourth quarter, and net profit per ton continued the trend of quarterly recovery. With the arrival of the peak season in October, the inventory replenishment market catalyzed a slight improvement in the price of box tile paper, but in November, price competition in the industry intensified, and paper prices pulled back again. The industry we are tracking showed weak month-on-month repairs of box board paper and corrugated paper, which ranged from one month to another, at around 70/135 yuan/ton, respectively.

At the same time, with the recovery of production capacity utilization in the 4Q, the fixed cost per ton may have declined, driving Shanying's net profit of 4Q23 tons back to more than 100 yuan (net profit of 3Q23 tons ~ 50 yuan), an increase of more than 50 yuan over the previous month.

Prices in 1Q24 may be bottoming out in a new round. I am optimistic that the 24-year tonne profit will slowly recover from season to season. Looking at the one-year dimension, we believe that on the one hand, domestic demand may still be weak, and the oversupply pressure in the box board and corrugated paper industry is prominent; on the other hand, considering the zero tariff policy on imported paper remains unchanged, we judge that the volume of imported box cover paper may remain above 8 million tons in 2024 (8.54 million tons for the full year of 2023), but the impact of the new imported paper increase has clearly weakened. At the same time, we have observed that the recent rise in sea freight rates may further raise the cost of imported paper and cushion the impact on domestic paper prices during the off-season. Looking at the price level, the first half of the year is a traditional low season, and prices may face a new round of bottoming out; in terms of profit, we are optimistic that in 2024, leading companies will maintain a trend of slow quarterly restoration, while small and medium-sized enterprises have been in losses for more than 1 year, and there may be a passive drop in capacity utilization and a slow exit.

Take the initiative to slow down production capacity investment and pay attention to marginal changes in regional markets. According to the previous announcement, considering the industry cycle and the company's own business conditions, the company took the initiative to slow down the construction progress of some bases; Nine Dragons also announced the cancellation of 300,000 tons of box board paper construction in Beihai, and the marginal increase in the industry in 2024 was lower than the market's previous expectations. According to our statistics, the main new production capacity of the leading companies in 2024 was: Shanying (300,000 tons of Jilin, which was put into operation in January), Wuzhou Special Paper (600,000 tons Hubei), and Nine Dragons (1.2 million tons Hubei Phase II); while small and medium-sized enterprises are struggling to maintain new production capacity. Furthermore, we would like to focus on regional market performance in 2024. Additional production capacity is concentrated in Central China and South China. The price side of the region may be clearly under pressure in 2024.

Profit forecasting and valuation

Considering that demand recovery fell short of expectations, we lowered our 2023 net profit by 34% to 130 million yuan; kept the 2024 net profit of 1.1 billion yuan unchanged, and introduced net profit of 1.4 billion yuan in 2025, and the current price is 7x and 5x; we maintained the outperforming industry rating. Considering that the sector's risk appetite is still low, we lowered our target price by 17% to 2.5 yuan, and the corresponding 2024-25e P/E is 10x, 7x, implying 44% upward space.

risks

Risk of demand falling short of expectations; risk of additional supply exceeding expectations; risk of excessive debt ratio.