Incident: Yueyang Lin Zhi released its 2023 annual report: achieved revenue of 8.641 billion yuan, a year-on-year decrease of 11.66%; realized net profit of 238 million yuan; realized deducted net profit of 209 million yuan, a year-on-year decrease of 98.32%.

In 2023, Q4 achieved revenue of 2,021 billion yuan, a year-on-year decrease of 39.82%; realized net profit attributable to mother - 354 million yuan; and realized net profit deducted from non-mother - 56 million yuan.

23 The downstream demand for cultural paper was weak throughout the year, and demand in the garden industry continued to be sluggish. In 2023, the overall global consumption of the cultural paper industry showed a downward trend. Downstream demand in the paper industry was weak, and overall domestic competition was fierce. Supply shocks were impacted by the investment of new production capacity and the increase in the operating rate of small and medium-sized manufacturers. Product prices declined compared to the same period; demand for garden ecology projects at the industry level declined, and Chengtong Kaisheng's losses increased. By business, the company's paper industry/forestry/chemical/construction and installation industry/municipal park forestry achieved revenue of 59.42/9.33/2.02/3.20/659 million yuan respectively, a year-on-year change of -8.40%/+21.89%/-3.51%/+13.18%/-32.90%. In terms of sales volume, the company achieved sales of 84.35/18.92/2.03/69.10/150,000 tons of printing paper/ wrapping paper/ office paper/ wood/ chemical products in '23, respectively, with a year-on-year change of +0.17%/+12.89%/-13.62%/+24.24%/-0.60%. The decrease in industrial paper production and sales volume was mainly due to the company's adjustment of the product structure according to market demand; printing paper inventory fell 36.3% year-on-year, mainly due to its production and sales rate greater than 100%.

The gross margin of paper products has declined, and it should be mentioned that they should be taken lightly. By product, the gross margin of the company's printing paper/wrapping paper/ office paper/ industrial paper/ wood sales/chemical products was 9.4%/7.5%/6.9%/2.8%/2.5%/32.5%, respectively, with year-on-year changes of -9.5/-2.8/-4.3/-0.4/+2.7pct. In terms of cost ratio, the company's sales/management/R&D/finance expenses in '23 were 1.26%/2.78%/3.03%/1.83%, respectively, with a year-on-year change of +0.11/-0.22/-0.06/+0.12pct; management expenses decreased 7.3% year-on-year, mainly due to a decrease in the company's share payment fees. The company's net profit lost mainly due to 1) Weak downstream demand in the paper industry, intense domestic competition, and lower product prices compared to the same period; at the same time, due to factors such as full-system overhauls, the company's paper product production declined compared to the same period. 2) Affected by environmental protection policies, the company cleaned up some forest assets. 3) The garden ecology industry market is still sluggish. Affected by the overall downward trend in the industry, the company is preparing to reduce the value of Chengtong Kaisheng's goodwill. In February '24, the company transferred 39.51% of Shuangyang Hi-Tech's shares to the actual controller China Paper for 142 million yuan. After the transaction was completed, the company held 38.72% of Shuangyang Hi-Tech's shares. The company actively deepens management structure reform, implements tenure system and contractual management, and implements rigid assessment and implementation.

Investment advice: CCER restart and implementation, focus on the batch release of methodologies in the medium term & the rise in carbon prices. On the morning of January 22, 2024, the National Greenhouse Gas Voluntary Emissions Reduction (CCER) deal was launched in Beijing. Chengtong Carbon Sink is the chairman unit of the Forestry Carbon Sink Branch of the China Forestry Industry Federation and participated in the formulation of China's forestry carbon sink standards — the “Forestry Carbon Sink Project Validation and Certification Guidelines”. By the end of 2023, the company had contracted 4.42 million mu of carbon sink development, and had signed a total of 36.47 million mu of woodland and 3.06 million mu of farmland carbon sink development contracts. The company expects to sign 50 million mu of forestry carbon sink in 25 years. Combining the company's production capacity of 450,000 tons of cultural paper, which may be implemented by the end of this year, and CCER restarts or opens carbon remittance revenue with a high gross margin, we expect net profit to mother of 4.17/5.78/665 million yuan for 24-26, corresponding to a PE valuation of 21/15/13X, maintaining the “recommended” rating.

Risk warning: The risk that downstream demand for paper products falls short of expectations, and the CCER approval process falls short of expectations.