1HFY24 performance is in line with expectations
Nine Dragons Paper 1HFY24 achieved net profit of 292 million yuan, turning a loss into a profit, in line with the company's earnings release on January 29 (estimated net profit of 200-40 million yuan). Net profit per ton was restored to 29 yuan/ton, confirming that the most difficult stage has been passed. We expect that in 2024, box board corrugated paper is expected to benefit from increased production capacity investment and mitigation of import shocks, combined with improvements in the company's cost control, and the improvement in business conditions is expected to continue. Due to 1HCY24's weak seasonality, the market may still face some challenges, and we expect that the paper price improvement may still be moderate. However, with the advent of the 2HCY24 peak season, the supply and demand relationship in the industry is expected to be better rebalanced, further accelerating the company's profit recovery. We kept the FY24/FY25/FY26 EPS forecast of $0.13/0.68/0.68 unchanged, with a target price of HK$4.66, based on 0.44 times FY2024 P/B (BPS: $9.63), which is 1 standard deviation lower than the average since 2009, to reflect the decline in the center of demand growth. Maintain a buy rating.
Strong sales growth, improved gross margin, and strengthened cost control
Accelerated sales growth, marginal improvement in gross margin, and further strengthening of cost control have all supported the company 1HFY24 to turn a loss into a profit. 1HFY24's finished paper sales reached nearly 10 million tons, +16.3% year over year, significantly faster than 1HFY23 (+2.1% year over year). We believe this is the result of a combination of the company 1) the release of new production capacity at bases such as Beihai, Shenyang, and Malaysia; 2) the further restoration of demand for corrugated board in 2HCY23; and 3) the company's market strategy to respond more actively to fluctuations in demand.
Although the company's ASP was -15.6% to 3,063 yuan/ton, benefiting from a faster downward trend in tonnage costs (-21.4% to 2,792 yuan/ton), gross margin improved 6.6pct to 8.8% year over year. The total sales and management expenses were 2.19 billion yuan, implying that the sales and management expenses of tonnage paper ranged from -20% to 219 yuan/ton, reflecting the company's stricter cost control in terms of marketing and administration.
Cost control is expected to be further strengthened. The inflection point of supply and demand in the industry is gradually approaching. By the end of 2023, the company's fiber raw material production capacity was 4.72 million tons/year, accounting for 22.3% of the paper production capacity. With the commissioning of projects under construction in the North Sea and Malaysia, the total production capacity of fiber raw materials is expected to reach 7.04 million tons/year by the end of 2024, which will account for 31.5% of paper production capacity. With the commissioning and release of fiber raw material production capacity, we expect the company's cost control capabilities to be further strengthened, and the product structure is expected to be easier to upgrade and optimize. Thanks to the obvious slowdown in new production capacity investment in the box board corrugated paper industry and the narrowing of domestic and foreign waste paper price differences, we expect the impact of the box board corrugated paper industry on the supply side to ease significantly in 2024, and the pressure on the supply and demand balance in the industry is expected to gradually ease. After overcoming the phased challenges brought about by the low demand season for 1HCY24, we expect the company's profit recovery from 2HCY24 to accelerate further.
Risk warning: Consumption is picking up more slowly than expected, exports are steadily slower than expected, and supply investment is stronger than expected.