1HFY24 results are in line with our and market expectations
The company announced 1HFY24 results: revenue of 30.6 billion yuan, -1.9% year-on-year; net profit changed from loss to profit of 292 million yuan year-on-year (at the center of the previous profit forecast), which was 1,389 million yuan for the same period last year, in line with our expectations. Comment: 1) Sales volume increased 17% year on year, and the average price continued to bottom: Looking back at 1HFY24, domestic demand performance was lackluster, and short inventory replenishment led to a slight increase in price, but sustainability was insufficient; we counted 2H23's additional domestic production capacity exceeding 4 million tons, with 4.58 million tons on the import side (+1.52 million tons year on year), highlighting supply and demand pressure. We estimate that the company's 1HFY24 average price was -17% YoY /month-on-month -4% to ~3,050 yuan/ton; the company announced that it achieved sales volume of ~10 million, +18% YoY +25% month-on-month, the main increase is due to Box board paper (+1.7 million tons year over year). 2) Net profit per ton changed from loss to profit, but it is still at the bottom of history: we estimate that net profit per ton is about 29 yuan/ton (same period last year - 163 yuan, 333 yuan/ton in the same period last year), and 4Q23 pulp paper prices have clearly recovered (accounting for ~ 18% of sales), which may be an important reason why the company's single-quarter performance exceeded expectations; in addition, during the reporting period, the company actively optimized the packaging paper product structure: corrugated paper sales declined slightly, and sales of high-end boxboard paper increased markedly. 3) FY24 capital expenditure and financial expenses are still high: 1HFY24's financial expenses were 600 million yuan, with a high base of +8%, mainly an increase in bank loans; 1HFY24 capital expenditure of 6.6 billion yuan, and the company's net operating cash flow and free cash flow were -2.5 billion yuan and -91 billion yuan, clearly under pressure; the company directed FY24's total capital expenditure of 13 billion yuan (FY23 was 17.7 billion yuan), a year-on-year decline, but it was still at its peak. As of the end of 23, the company announced that it had not withdrawn a bank credit line of 42.3 billion yuan.
Development trends
The impact of imported paper exceeded expectations, but the impact of new additions weakened marginally. In 2023, tariffs on some imported paper in China returned to zero. According to the General Administration of Customs, the import volume of box tile paper was 8.54 million tons, +2.9 million tons; under weak domestic demand and increased supply concentration, import tariffs were reduced to zero to highlight the cost advantage of imported paper; second, imported paper from Southeast Asia directly impacted the South China market, and price wars are not uncommon, and Dongguan in South China is the core factory area of Nine Dragons. Looking ahead to 2024, we judge that imported paper is still at an all-time high for the whole year, but the new impact is expected to abate, while rising shipping and external waste costs may further increase the cost of imported paper and cushion the impact on domestic paper prices.
Production capacity was quickly launched as scheduled, and the cost advantage gradually returned. The company announced that 3Q23YTD has launched 800,000 tons of cow card +550,000 tons of cultural paper in Beihai as scheduled, 300,000 tons of corrugated paper from Malaysia, and 100,000 tons of wood fiber from Vietnam, with a total paper+fiber production capacity of more than 25.8 million tons; the company announced that it plans to slow 600,000 tons of chemical machine pulp+1.1 million tons of chemical machine pulp production capacity in Beihai and delay it by one quarter until 3Q24; it was originally scheduled to launch 1.2 million tons of box tile paper in Hubei, and changed production to 600,000 tons of cultural paper (2Q25 launch). Different, Nine Dragons dynamically adjusts the launch pace and product Categories, focusing on diversified product structures and industrial chain integration.
In addition, coal prices were high in 2021-23, and leading energy costs of owning their own power plants were not superior. The industry's cost curve was flattened. As coal prices fell, the cost advantage on the leading energy side gradually returned.
Profit forecasting and valuation
We keep our FY24-25 profit forecast unchanged. The current price is 0.3x and 0.3x for the FY24-25 P/B; we maintain our outperforming industry rating and target price of HK$4.9, and the target price corresponding to the FY24-25 P/B is 0.5x and 0.5x, implying 29% upward space.
risks
Demand fell short of expectations; new production capacity exceeded expectations; the impact of imported paper exceeded expectations; debt ratios rose too fast.