Incident: The company released its 2024 quarterly report: 2024Q1 achieved revenue of 1,960 billion yuan, a year-on-year decrease of 22.31%; realized net profit to mother of 81 million yuan, a year-on-year decrease of 7.60%; realized net profit after deduction of -41 million yuan, turning a year-on-year loss.

Demand is declining, competitive pressure is increasing, and the company's revenue is temporarily under pressure. The company achieved revenue of 1,960 billion yuan in a single quarter in 24Q1, a year-on-year decrease of 22.31%. Mainly due to lower market demand, Huatai/Nine Dragons each started production capacity of 52,550 thousand tons of cultural paper in 24Q1. Competitive pressure on the industry intensified, and the company's paper sales price decreased compared to the same period last year.

Gross margin has declined, and demand is improving, or is expected to bottom out and rebound. In the 24Q1 quarter, the company achieved net profit of 81 million yuan, a year-on-year decrease of 7.60%; net profit after deduction was -41 million yuan, which turned into a year-on-year loss, mainly due to three factors:

1. Overall domestic competition is intense, with paper prices falling compared to the same period last year; 2. The garden ecology industry market is still sluggish, and the gross profit of the subsidiary Chengtong Kaisheng Ecological Construction Co., Ltd. decreased compared to the same period last year; 3. The company transferred 38.72% of Shuangyang Hi-Tech's shares (transfer price of 140 million yuan) and relinquished its priority right to increase capital. The company's profit for the same period last year. By business: the papermaking sector produces 250,000 tons of cultural paper, with a profit of about 200 yuan per ton; the garden business Ningbo Kaiyu Enterprise Management Service Co., Ltd. terminated the PPP project early, and the project assets were repurchased by the Housing and Urban-Rural Development Bureau of Beilun District of Ningbo City for 583 million yuan (2018 investment amount was 674 million yuan); in the forestry business in February 2024, Hunan and Hubei experienced two rounds of rain, snow, and freezing disasters, which had an adverse impact on the company's forest assets. 2024Q1's gross margin was 7.05%, down 4.76pct year on year, mainly due to falling paper prices. The 2024Q1 company's expense ratio increased by 0.09 pct to 9.64% year on year, with management/sales/R&D/finance expenses rates of 3.11%/1.45%/3.49%/1.59%, respectively, with year-on-year changes of -0.32/+0.26/ -0.03/+0.18pct. We determine that the slight increase in sales expenses was mainly due to the company laying out a market for 450,000 tons of new production capacity at the end of the year. In terms of cash flow, net operating cash flow for 24Q1 was $11 million, a year-on-year decrease of 25.45%, mainly due to lower paper prices. As of 2024.04.18, the price of cultural paper increased by 200 yuan to 5,900 yuan/ton from the 24Q1 low. As tenders enter the peak season in the second quarter, we expect the 24Q2 company's cultural paper profit may continue to improve month-on-month.

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 Verification and Certification Guidelines”. By the end of '23, the company's carbon sink development contract area was 4.42 million mu. A total of 36.47 million mu of woodland and 3.06 million mu of farmland had been signed. The company expects to sign 50 million mu of forestry carbon sink development in 25 years. Combined with 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/ 5.48/ 633 million yuan for 24-26. The corresponding PE valuation is 19X/15X/13X, maintaining the “recommended” rating.

Risk warning: Risk that CCER restart progress falls short of expectations; downstream consumption recovery falls short of expectations risk.