Key points of investment

Turning a loss into a profit is in line with profit expectations:

1HFY24 (2H23 in the natural year) recorded operating income of 30.61 billion yuan, -1.9%; gross profit increased sharply by 294.4% to 2,706 billion yuan, and gross margin increased by about 6.6 percentage points to 8.8% year over year, mainly because the decline in average selling price (about -15.6% yoy) was lower than the decline in average cost (about -22% yoy); in the end, it recorded a net profit of 292 million yuan, which turned a loss into profit (recorded a net loss of 1,389 million yuan in the same period last year), which was at the center of previous profit expectations.

The new plant was successfully put into operation, and sales achieved double-digit growth:

During the period, along with the successful commissioning of the North Sea and Malaysia projects, by the end of 2023, the company's annual paper production capacity reached 21.12 million tons, an increase of 2.35 million tons over the previous year. Benefiting from increased production capacity and inventory reduction strategies, the company's 1HFY24 sales volume was +16.3% to 10 million tons; among them, the sales volume of kraft paper/ high-strength corrugated paper/ whiteboard paper was 570/250/1.4 million tons, respectively, with year-on-year changes of +42.5/ -7.4%/remained flat, and revenue changed +18.9%/-18.7%/-15.0% year-on-year, respectively. Sales of cultural paper and specialty paper remained flat compared to the same period last year, with revenue changes of -24.5%/-5.6% year-on-year, respectively.

Capital expenditure is expected to gradually decline, and the blueprint for integrated pulp and paper is progressing steadily:

Affected by the national anti-waste policy, the company has invested a large amount of capital in recent years to build production capacity for upstream high-quality raw materials. By the end of 2023, the total annual production capacity of fiber raw materials reached 4.72 million tons, an increase of 2.17 million tons over the previous year; it is expected that the company's capital expenditure will gradually decline from the high point of the previous fiscal year, and the company will continue to improve the integrated layout of pulp and paper, give full play to the advantages of the vertical industry chain, and continuously optimize the product structure and increase profitability.

A “Buy” rating is given, and the target price is HK$4.57:

The company's most difficult period is over, and profitability is expected to gradually recover. We expect the company's EPS for the 2024-2026 fiscal year to be $0.21/0.52/0.70, respectively, and the target price is HK$4.57, corresponding to 20 times PE and 0.4 times PB in fiscal 2024. There is room for an increase of 25.9% compared to the current price, giving it a “buy” rating.