Key points of investment

The company achieved revenue of 29.333 billion yuan in 2023 (-13.76% YoY), and net profit to mother was 156 million yuan, slightly exceeding the performance forecast limit, and net profit not attributable to mother was -298 million yuan. 2023Q4 achieved revenue of 8.021 billion yuan (YoY -6.35%, month-on-month +6.04%), net profit to mother of 273 million yuan (year-on-year loss), net profit of 60.41 million yuan (year-on-year reversal loss); 2024Q1 achieved revenue of 6.669 billion yuan (+5.00% YoY), net profit attributable to mother was 39.06 million yuan (year-on-year reversal loss), net profit of -15.48 million yuan (year-on-year reversal loss).

Demand for terminals picked up in 23, and the 24-year boom is expected to moderately restore revenue of 19.241 billion yuan (YoY -11.75%) and 7.080 billion yuan (YoY -7.78%), respectively, and gross margins of the paper and packaging sector were 7.51% (+1.35pct) and 13.40% (YoY +2.69pct), respectively;

(1) Papermaking: In 2023, the papermaking sector produced 6.7847 million tons (+10.35% YoY), with sales volume of 6.777,300 tons (+9.97% YoY), with a production and sales rate of 99.89%, and a tonne selling price of 2,839 yuan (-20% YoY). Affected by factors such as the adjustment of import tariff policies for finished paper products, increased supply of corrugated cardboard, and the slow pace of recovery in terminal demand, etc., paper prices declined in 2023. According to statistics from Zhuochuang, the average annual price of AA-grade 120g corrugated paper in 2023 was 2,914 yuan/ton, a year-on-year decrease of 18.7%; the average annual price of box board paper was 3,947 yuan/ton, a year-on-year decrease of 16.47%.

(2) Packaging: In 2023, the packaging sector achieved an output of 2,060 billion square meters, sales volume of 2,066 billion square meters, and a production and sales rate of 100.28%. The company developed orders from major customers in the daily chemical, FMCG, food and other industries. The gross margin increased year on year. The share of sales orders from major customers in the packaging sector group increased to 42% in 2023, an increase of about 9 percentage points over the previous year. Comprehensively promote horizontal collaboration in cardboard, carton and pulp molding, continuously optimize product, regional and industry structures, and enhance overall profitability.

Optimize the debt structure and enhance financing capacity

The company's Guangdong and Central China subsidiaries introduced strategic investors, and equity financing of 1 billion yuan was gradually put in place. In 2024, it will continue to promote the sale of shares in the Nordic paper industry to enhance its continuous financing capacity and resilience to risks. The company controlled various expenses. Management and sales expenses were reduced by 185 million yuan year-on-year in 2023. The core management took the initiative to cut salaries in the second half of the year, and the company's management expenses rate was effectively controlled.

Dividends are returned to external investors, and the incentive plan enhances internal momentum. In 2023, the company will pay a cash dividend of 0.11 yuan (tax included) for every 10 shares, and a proposed discovery dividend of 475.17,500 yuan (tax included), with a cash dividend ratio of 30.42%. The company announced the 2024-2026 incentive plan. 50% of the current annual assessment bonus will be distributed to the incentive target, and the remaining 50% will be included in the incentive plan fund prize pool. When the net profit of the parent is X ≤ 0, the incentive plan fund is not withdrawn; the net profit of Danggui mother is 0 1.2 billion yuan, and directors and supervisors extract 12* 0.8% + (X-12) * 2%; non-directors and supervisors withdraw 12* 2.2% + (X-12) * 3% to stimulate core employee motivation.

Profit margin and operating cash flow improved significantly year on year, and expenses were well controlled (1) Profit margin: In '23, the company achieved a gross profit margin of 9.87% (+2.64pct year over year) and achieved a net profit margin of 0.53% (+7.17pct year over year).

(2) Period expense ratio: The cost rate for the 23-year period was 12.58% (YoY +1.77pct), of which the sales expense ratio was 1.30% (YoY +0.15pct), the management and R&D expense ratio was 7.69% (YoY +0.56pct), and the financial expense ratio was 3.59% (YoY +1.06pct).

(3) Operational efficiency and cash flow: In '23, the company's accounts receivable and notes were $4.735 billion (year-on-year +$345 million), notes and accounts payable of $6.125 billion (year-on-year +$1,240 million), and inventory of $2,823 billion (y-o-y -507 million yuan). In terms of cash flow, net operating cash flow in '23 was $3.167 billion (year-on-year +2,963 billion yuan). Changes in net cash flow from operating activities were mainly due to an improvement in the profit situation in the current period compared to the previous year.

Paper production capacity expanded in an orderly manner, and the layout of raw materials was gradually improved

With the completion of the Zhejiang Shanying 770,000 ton papermaking project and the Jilin Shanying Phase I 300,000 ton corrugated paper project, the company's production capacity reached 8.12 million tons in 2023, and supporting projects supporting 500,000 tons of raw fiber are being implemented one after another. The raw material self-sufficiency rate is expected to gradually increase, and the fiber resource layout is expected to continue to improve the profitability of high-end wrapping paper products.

Profit forecasting and valuation

The price and profit situation of box board corrugated paper fluctuated with demand, and there was a risk that industry demand would be insufficient. We lowered the company's profit forecast. We expect the company to achieve revenue of 323/362/38.5 billion yuan in 24-26, +10%/+12%/+6%, respectively, and achieve net profit of 6.29/10.58/1,375 billion yuan, respectively, +303%/+68%/+30% year-on-year, respectively. The corresponding PE is 13/8/6X, maintaining the “buy” rating.

Risk warning

Downstream sentiment fluctuates, production capacity is concentrated, and paper price recovery falls short of expectations