The company released the FY2024H1 performance report: FY2024H1 achieved revenue of 30.61 billion yuan (-1.9% YoY), net profit to mother of 292 million yuan (YoY +121.1%), sales volume +16.3% YoY to 10 million tons, net profit of 35 yuan per ton after excluding exchange gains and losses (average net profit per ton of FY2023H1/H2). In the second half of 2023, the industry recovered moderately, market demand picked up, raw material costs declined, and profits improved markedly from month to month.

Demand picked up during the peak season, and profits recovered month-on-month. In terms of wrapping paper, FY2024H1 achieved revenue of 28.146 billion yuan (+1.4% YoY) and sales volume of 9.6 million tons (YoY +18.5%). Of these, sales volume of kraft paper/ corrugated paper/ gray whiteboard remained flat +42.5%/-7.4%/-12.2%, unit prices were -14.4%/-16.6%/-12.2%, respectively. Downstream demand for wrapping paper during peak season was fixed, and sales increased year-on-year; in terms of cultural paper, FY2024H1 achieved revenue of 2.120 billion yuan (YoY -24.5%), and sales remained flat year-on-year, with flat sales volume and unit price YoY -24.5%. Currently, industry demand is improving, and the company has issued price increase letters and price increases are gradually implemented. Along with product structure optimization (rich raw material structure, increased share of middle and high-end products) and financial cost savings (debt structure optimization), we expect profits to continue to recover.

The pace of capacity expansion is slowing down, and capital expenditure is expected to fall from a high point. By the end of 2023, the company's total pulp and paper production capacity was over 25 million tons, of which the papermaking/raw material production capacity was 21.12 million tons/4.72 million tons, respectively, an increase of 2.35 million tons/2.17 million tons over the previous year. In terms of finished paper, the company's current production capacity of wrapping paper/cultural paper/specialty paper was 1.13 million tons/1.12 million tons/270,000 tons, respectively, and the product structure continued to be optimized; the raw material layout continued. 1.7 million tons of wood pulp and 420,000 tons of wood fiber are still in the middle of the construction cycle. Due to weak industry demand in 2023, the company postponed part of its production expansion plan. FY2024H1 capital expenditure was -38.7% to 6.60 billion yuan. We expect the company's capital expenditure and debt size to gradually decline from a high point (FY2024H2 is expected to be 6.4 billion yuan), the pressure on depreciation and interest expenses will slow down, and bottom profit is expected to consolidate and improve.

Raw material costs continue to be optimized, and profitability improved month-on-month. FY2024H1's gross margin was 8.8% (+5.5pct month-on-month, +6.6pct year-on-year), and the sales/management and R&D/finance expense ratios were 3.55%/3.44%/2.06% (-0.1pct/-0.5pct/+0.2pct), respectively, and the corresponding net margin to mother was 0.96% (+4.9pct month-on-month, +5.4pct year-on-year). FY2024H1 was accompanied by a decline in papermaking costs and a recovery in downstream demand. The decline in raw material costs was higher than the drop in product sales prices, and wood pulp was put into operation at various bases. The company's fiber raw material mix was gradually optimized, raw material costs were further reduced, and the company's profit recovered month-on-month.

Profit forecast and rating: Demand picked up during the FY2024H1 peak season, combined with reduced raw material and energy costs, and profit improved month-on-month. The company's category structure continues to be rich, and the raw material base layout is expected to consolidate the bottom profit. We expect FY2024-2026's net profit to be 800 million yuan/2 billion yuan/3.3 billion yuan respectively. The corresponding PE is 20X/8X/5X, respectively, maintaining a “buy” rating.

Risk warning: Downstream demand recovery falls short of expectations, industry competition intensifies, production capacity investment falls short of expectations, and risk of debt expansion.