The company released its 2024 quarterly report: 2024Q1 achieved revenue of 1,726 million yuan (+37.2% year-on-year), net profit of 134 million yuan, and net profit of non-return to mother of 132 million yuan. Affected by the Spring Festival in 24Q1, sales volume fell slightly month-on-month, price increases were gradually implemented, and average prices increased steadily month-on-month; benefiting from early storage of pulp, the cost increase on the reporting side was manageable, and net profit per ton declined slightly. Assuming Q1 sales volume of 285,000 tons (-30,000 tons month-on-month), according to our estimates, the average price of Q1 is about 6057 yuan/ton (+174 yuan/ton month-on-month), and the net profit per ton is about 470 yuan/ton (-57 yuan month-on-month). Looking forward to the future, the company issued consecutive price increase letters in March-April. The average price of Q2 is expected to continue to rise, and self-produced pulp production capacity is climbing, overall costs are manageable, and the net profit performance of Q2 tons is expected to be stable.

Horizontal and vertical layout, clear growth path. In 2023, 22,000 tons of digital transfer paper and 18,000 tons of drawing paper were launched one after another, and 35,000 tons of industrial liner production capacity were acquired at the end of 23Q3. By the beginning of April '24, the company's total production capacity had reached about 1.4 million tons. In 2024, Hubei Phase I (box board corrugated paper) is expected to start trial production at the end of H1, and special paper projects will continue to be implemented. Total production capacity is expected to double by the end of '25, and the growth path is clear. Furthermore, the production capacity of 300,000 tons of chemical pulp continues to rise (mainly supplies food & cultural paper), and 600,000 tons of chemical pulp has now been publicized for the second time in the EIA. The process of integrating pulp and paper has been accelerated, which is expected to weaken the impact of the cycle.

The profit center has moved upward, and cost control is excellent. The gross margin of 2024Q1 was 13.0% (+9.5pct year over year), with a net margin of 7.8% (+10.1pct year over year), benefiting from the easing of cost pressure and improved profit margins. In the future, as the pulp and paper integration process accelerates, the profit center is expected to move upward; judging from the cost performance, the cost ratio for the 2024Q1 period was 4.9% (+0.8pct year over year), of which the sales/management/R&D/finance expense ratios were 0.2%/1.4%/1.7%, respectively (+0.04/-0.2/+0.6/+) 0.3 pct).

Excellent cash flow & operating capacity performance. 2024Q1's net operating cash flow was $173 million (+230 million yuan year over year). In terms of operating capacity, as of 2024Q1, the number of days receivable, payable, and inventory turnover was 56.26/38.82/35.33 days, respectively (-11.57/-10.34/ -21.20 days compared to the previous year).

Profit forecast: We expect the company's net profit to be 580 million yuan, 750 million yuan, and 90 million yuan respectively in 2024-2026, corresponding to PE of 11.1X, 8.5X, and 7.1X, maintaining the “buy” rating.

Risk warning: Raw materials fluctuate, demand recovery falls short of expectations, food card competition intensifies, and production capacity falls short of expectations.