The company released its 2023 performance forecast: net profit loss estimated at RMB 2-250 million (-132.5% ~ 140.6% YoY), median loss of RMB 225 million (YoY -136.6%), estimated net profit loss of 287-337 million yuan (YoY -152.4% ~ 161.5%), and median loss of RMB 312 million (YoY -157.0%). Net profit of 2023Q4 is estimated to have a loss of 316-366 million yuan (-323.2% ~ 358.5%, -2500.2% ~ 2879.8%), median loss of 341 million yuan (-340.9%, -2690.0%); net profit loss after deducting non-return to mother of 3.52 billion yuan (-414.7% ~ 459.4%, month-on-month -3662.3% ~ 4168.0%), median loss of 377 million yuan (-437.0% YoY, -391515.1% YoY) %). The company's profits are under pressure, mainly due to poor downstream demand, lack of improvement in the main paper industry, and loss of goodwill; short-term operating pressure still exists.

Operating pressure continues, and downstream demand is expected to improve. 1) Main paper industry: Due to new production capacity investment and the increase in the operating rate of small and medium-sized manufacturers, supply pressure on the cultural paper industry still exists, and downstream demand is weak. In addition, the sales price of the company's paper products fell 300-400 yuan/ton year on year in 2023. Furthermore, due to full-system overhauls, paper product production fell by about 20,000 tons year on year, and the company's paper profits continued to be under pressure. Profitability is expected to recover marginally in 2024 with the recovery of downstream demand in the industry and the gradual consumption of new production capacity. 2) Forestry and others: Affected by environmental protection policies, the company's clean-up of some forest assets affected profits of about 280 million yuan. Furthermore, due to the continuous downturn in the garden ecology industry, the operating entity Chengtong Kaisheng's operations were under pressure, and the company calculated that the impairment of goodwill dragged down the overall profit level.

CCER trading is restarted, and forestry carbon sinks are expected to contribute more. CCER trading officially resumed in January 2024. The first batch of methodologies included afforestation carbon sink, grid-connected photothermal power generation, grid-connected offshore wind power generation, and mangrove forest construction. The certification of the new afforestation methodology still maintains a high entry threshold. The company lays out forestry carbon sinks ahead of schedule and has technical and resource advantages. It has fully prepared PDD documents for signed projects and reserves customer resources for large state-owned enterprises and central enterprises in the energy, steel and other industries. As of October 2023, the company has signed a formal development contract covering an area of nearly 40 million mu (including 3.06 million mu of farmland carbon sink), with a development area of 3.41 million mu in the first phase. It is expected to reach 50 million mu by the end of 2025. The cooperative project and scale are growing steadily. With the restart of CCER trading, the company's performance is expected to continue to be realized.

Profit forecast and investment rating: The company's 2023Q4 performance is still under pressure. The main reason is that the pace of industry recovery is relatively slow, and the company's paper business is recovering slowly. In addition, factors such as asset processing and impairment of goodwill are dragging down the overall profit level. Considering that the company's forestry carbon sink business relies on multiple advantages of technical teams, backgrounds, and resources to build barriers, it is expected that performance will be achieved after CCER is restarted in 2024. Furthermore, along with the gradual consumption of production capacity in the cultural paper industry, the main pulp and paper industry is expected to recover. We lowered our early profit forecast. We expect net profit due to mother for 2024-2025 to be 36/680 million yuan respectively, corresponding to PE of 24X/13X, maintaining a “buy” rating.

Risk warning: Downstream demand recovery falls short of expectations, forestry carbon emissions fall short of expectations, and industry competition intensifies.