Introduction to this report:
The company's profit elasticity is worth looking forward to under the three major catalysts of marginal improvement in industry supply and demand, the availability of high-quality raw materials to support product premiums, and slowing capital expenditure to ease depreciation pressure.
Summary:
Covered for the first time, a “gain” rating was given. The bottom of the industry cycle is gradually recovering upward. As an industry leader with leading scale, the company has an in-depth forward-looking layout of raw materials, products, and channels, combined with optimization of external supply and demand patterns, and profit flexibility can be expected. We expect FY2024-2026's net profit to mother of 7.8/26.8/3.35 billion yuan, turning negative year-on-year to positive/ +242%/+25%. Referring to comparable companies, combined with the PE/PB valuation, the company was given a target price of HK$4.4, which for the first time covered a “gain” rating.
Internal and external factors resonate, and profit flexibility can be expected. 1) The production capacity of the industry's peak capital expenditure cycle has basically been released. Since 2024, the new production capacity center has declined significantly. Combined with a moderate recovery in demand, the impact of imported paper weakens, and the supply and demand pattern of the industry has improved marginally. 2) High-quality fiber production capacity is being deployed one after another, and the raw material gap is gradually filled, the competitiveness of high-end products is consolidated, the product structure is optimized, and resource premiums are obtained. In addition, the company actively adjusts production, lays out products with high unit prices, and increases profitability. 3) The current depreciation rate for a single ton is at an all-time high. As capital expenditure slows down (capital expenditure is expected to be -27% year-on-year in 2024FY), depreciation pressure has eased, contributing to incremental profits.
The industrial chain layout is perfect, and diversified product line coverage. The company is engaged in the production and sale of a variety of high-quality packaging cardboard products, including cardboard, high-strength corrugated paper, whiteboard with gray background, environmentally friendly cultural paper, special paper, high-strength corrugated cardboard, high-strength corrugated boxes and pulp. At the same time, the company lays out upstream fiber raw materials, downstream packaging plants, and collaborative production at multiple bases to provide customers with a full range of one-stop efficient packaging services.
The bottom of the industry is recovering, and we are waiting for price signals. Social inventories of corrugated paper and box board fell month-on-month in February 2024, and the absolute value is at the bottom since 2021. Judging from the operating rate, the operating rate was actively adjusted after the Spring Festival peak season to ease the conflict between supply and demand. There has been no significant improvement in terminal demand. In addition, April was in the low season for traditional consumption. Most downstream packaging factories maintained the procurement they had just needed, and the willingness to replenish stocks was weak.
As the peak consumption season approaches during the year, the impact of imported paper is fully absorbed, and demand for inventory replenishment is expected to take the lead in driving up prices. Looking back, the industry's new production capacity has been systematically shrinking, and the trend is clear. It is worth looking forward to the restoration of capacity utilization and a moderate rise in prices.
Risk warning: Downstream demand recovery falls short of expectations, and raw material prices have risen sharply.