Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 26.609 billion yuan, -16.9%; net profit to mother - 1,281 billion yuan, mainly due to ① the sharp year-on-year decline in sales and prices of the company's mechanical paper due to weak downstream demand and concentrated investment in additional production capacity; ② high raw material prices squeezed profit space. 2024Q1 achieved revenue of 6.76 billion yuan, +9.8% year over year, and achieved net profit of 58 million yuan, +121.3% year over year, mainly due to: ① the company divested its non-main business and obtained a profit and loss of 235 million yuan from the disposal of illiquid assets; ② the price of main raw materials and energy decreased year on year, pulp and paper production and sales increased year on year, and the company's profitability increased.
Revenue from major products was under pressure in the short term, and the size of debt was gradually reduced. By product, the revenue of double adhesive paper/white cardboard/electrostatic paper/coated paper in 2023 was 77.02/54.78/40.06/39.26 billion yuan respectively, -8.8%/-39.6%/-1.8%/-5.4%, accounting for 29%/20.6%/15.1%/14.8% of revenue, respectively.
The net cash flow from the company's investment activities in 2023 was $58 million, +102.4% year over year, mainly due to revitalizing financial leasing business assets in 2022. The subsidiary Jiangxi Chenming participated in the establishment of a partnership to influence the increase in cash outflow from investment activities; net cash flow from financing activities was -57.84 billion yuan, compared to -191.95%, mainly due to repayment of maturing debts and reducing the size of debt.
Expense control was good, and profitability was restored in 24Q1. In 2023, the company's comprehensive gross margin/net margin was 8.1%/-5%, -6.3pct/-6pct; the 2024Q1 company's comprehensive gross margin/net margin was 12.4%/1%, +1.9pct/+5.4pct year-on-year. The total cost rate for the 2023 period was 15.4%, +1.6pct year-on-year, with sales/management/R&D/finance expenses rates of 0.9%/2.6%/4.4%/7.6%, respectively, and +0.1pct/+0.2pct/+0.3pct/+0.8pct. The total cost rate during 2024Q1 was 14.3%, -1.7 pct year on year, with sales, management, R&D, and finance expenses rates of 0.7%/2.8%/4.6%/6.2%, respectively, -0.1 pct/-0.4 pct/+0.1 pct/-1.3 pct.
Gradually divest non-main businesses and focus on the development of the main pulp and paper industry. In recent years, the company has gradually divested and reduced its non-main business, focusing its main efforts on the main pulp and paper industry, such as the relocation of Wuhan Chenming, Jinxin Futures equity transfer, and financial leasing business of more than 20 billion yuan at its peak, and introducing high-quality strategic investors such as Jianxin Investment, Chuanfa Investment, Bank of Commerce Investment, and Xiamen Guomao to optimize the capital structure. In March 2024, the company announced the transfer of 90.05% of its shares in Shandong Royal View Hotel and its claim to the related party, Shouguang Chenming Guangyuan Real Estate Co., Ltd., with a transaction consideration of RMB 360 million. After the transaction was completed, the company no longer held shares in Imperial View Hotel. In addition, 24Q1's goodwill decreased by 76.51% compared to the beginning of the year, mainly due to the disposal of shares in the subsidiary Tuoan Plastics.
By refocusing on its main business and gradually divesting non-main assets, the company is expected to continue to optimize the asset structure, improve asset quality, increase cash inflows, and enhance the company's profitability.
Profit prediction and rating: We believe that the company is gradually divesting its non-core business and refocusing on its main business, and the asset structure is expected to continue to be optimized. The net profit returned to mother is expected to be 160 million yuan, 680 million yuan, and 980 million yuan respectively in 2024-2026. The PB corresponding to the current stock price is 0.7x/0.6x/0.6x, respectively. Refer to comparable company valuations and give a “recommended” rating.
Risk warning: terminal demand falls short of expectations; raw material prices fluctuate; industry competition intensifies, etc.