2023 results exceeded expectations; 1Q24 results met our expectations

The company announced results: In 2023, the company's revenue was 29.33 billion yuan, and net profit to mother was 156 million yuan, which exceeded previous forecasts and our expectations, mainly due to revenue exceeding expectations. 1Q24's revenue was 6.669 billion yuan, +5% year-on-year, with net profit attributable to mother of 39 million yuan, turning a year-on-year loss into a profit. After deducting net profit of not to mother -- 15 million yuan, in line with our expectations, it was mainly government subsidies. 2023: ① Volume growth continued, average price reduction: annual sales volume of 6.777,300 tons and output of 6.7847 million tons, all +10% year-on-year, mainly due to the company's new production capacity climbing; the annual average price ratio was -20%, mainly due to weak demand and fluctuating at the bottom of the price. ② Net profit per ton continued quarterly recovery: Benefiting from the recovery in operating rate, the company turned a loss into a profit in 2Q23. As paper prices rose, we estimate that the 3-4Q23 ton net profit ring was restored to 50 yuan+ and 100 yuan+ per quarter. ③ Cash flow has improved dramatically, and debt is under pressure: net operating cash flow of 3.17 billion yuan, capital expenditure of 2.01 billion yuan; balance ratio of -2ppt to 71% year over year. The 2023 dividend rate is 30%. ④ The company plans to sell 48.16% of Nordic Paper's shares and optimize resource allocation: The company disclosed Nordic Paper's 2023 operating income and net profit of 3.18 billion yuan and 296 million yuan. The company received 140 million yuan in investment income and 100 million yuan in dividends from Nordic Paper.

1Q24: ① Weak off-season sales: We estimate 1Q sales volume to 1.5 million tons. 1Q is the traditional off-season, and the pressure on imported paper continues, leading to reasonable control of shipments to maintain prices. ② Shutdown losses+price drop affects net profit per ton: We estimate net profit of 1Q tons to be ~25 yuan, down 100 yuan+ from the previous month. ③ The company issued the 2024-26 “Long-term Incentive Management Measures”: Among them, the company uses the fiscal year as the assessment cycle, and can enjoy 50% of the current assessment bonus when the annual assessment is completed, and the remaining 50% is included in the incentive plan fund bonus pool. If the net profit of angelica mother is > 0, the incentive fund can be withdrawn. The net profit of angelica mother is > 1.2 billion yuan, and the withdrawal ratio and amount are higher.

Development trends

The 2024 tonne profit may slowly recover from quarter to quarter. We have observed that at present, domestic demand is still weak, and the pressure on overcapacity in the industry has not been relieved. At the same time, the pressure on imported paper continues, making it difficult for industry prices and ton profits to recover drastically in the short term. 1Q24 is a traditional low season, and the price bottom has arrived. We believe that in the future, along with a moderate recovery in demand and normal inventory preparation in the industry, price increases are expected to drive the company's tonnes of profit to recover quarterly. Furthermore, we estimate that as production capacity climbs, the company's sales volume will rise +10% year-on-year to around 7.5 million tons in 24.

Take the initiative to slow production capacity investment in 2024. According to the announcement, the company took the initiative to slow down the construction progress of some bases; Nine Dragons cancelled the construction of 300,000 tons of box tiles in Beihai and 1.2 million tons in Hubei. We count new additions in 2024: Shanying (300,000 tons in Jilin, put into operation in January) and Wuzhou (600,000 tons in Hubei); small and medium-sized enterprises are struggling with profit margins, making it difficult to maintain new production capacity. By the end of 2023, Shanying's total paper production capacity was over 8 million tons. Currently, the planned production capacity is mainly the 1.8 million ton project in Suzhou, Anhui. The company expects production capacity to reach the level of nearly 10 million tons in the medium term.

Profit forecasting and valuation

Considering that demand recovery still falls short of expectations, we lowered our 2024-25 profit forecast by 33%, 20% to $760 million, and the current price corresponds to the 2024-25 P/E to 11x and 7x; considering the slow recovery in sector tonnes of profit and rising risk appetite, we maintained an outperforming industry rating and target price of 2.5 yuan. The target price corresponds to the 2024-25 P/E of 16x and 10x, implying 34% upward space.

risks

Demand fell short of expectations; costs rose above expectations; new supply exceeded expectations.