Non-net profit deducted in 2023 exceeds our and market expectations
The company announced its 2023 results: achieved revenue of 8.55 billion yuan, +10.5% year on year; net profit to mother of 660 million yuan, -6.5% year on year, deducted non-net profit of 595 million yuan, +6.8% year on year, exceeding our and market expectations, mainly due to the 4Q23 net profit recovery exceeding expectations. Comment: 1) Sales of specialty paper are rising steadily, and the white card production and sales rate is low: in 2023, the company's sales volume was ~ 970,000 tons (+20% compared to the same period), of which sales volume of white card paper was ~ 110,000 tons (the company started production of 300,000 tons of food cards in 2Q23, and the capacity utilization rate was low during the climbing phase), and sales of specialty paper were ~860,000 tons, including sales of paper for the electrical industry, heat transfer paper, and glassine paper.
2) Food card losses dragged down tons of net profit: The company previously announced that white card 2Q23 lost more than 30 million yuan (including cash flow losses and deductions), while considering depreciation of new production lines, etc., and the white card side dragged down profits of more than 40 million yuan in the second quarter; the second half of the year was accompanied by a recovery in paper prices and cost reductions, and the overall net profit loss per ton narrowed rapidly. We estimate that the company's white card loss exceeded 60 million yuan for the full year of 2023. 3) Significant recovery of Xia Wang's investment income: In 2023, Xia Wang contributed 220 million yuan in investment income. We estimate that the annual sales volume will exceed 430,000 tons, and the net profit of 2H23 tons will be restored to more than 1,500 yuan. 4) Net profit of 2Q23 tons bottomed out, and 3-4Q23 stepped up: We estimate that the net profit per ton of the company headquarters in 2023 was ~ 645 yuan, of which net profit of 4Q23 tons was restored to 850 yuan.
5) Peak capital expenditure period: In 2023, net operating cash flow was 62 million yuan, capital expenditure was 4.3 billion yuan, and the balance ratio was 61% (+13ppt compared to the previous year). Currently, the company's Hubei and Guangxi projects have entered the peak construction period. In the short term, we suggest focusing on marginal changes in cash flow and debt.
Development trends
Special paper price hike+white card loss reduction supported 1H24's performance recovery and improvement. Looking ahead to 1H24, the company has increased various types of paper by varying degrees since March. Among them, heat transfer paper and glassine paper have been implemented well overall, which we believe is expected to support 1H24's performance; the company's white card paper production side is running smoothly, and we estimate that the ton loss in the first half of the year was significantly narrower than in 2023. Furthermore, the overall pattern of decorative paper is excellent. We estimate that 1H24 Xia Wang's profit level will be high and stable, and the return on investment side will continue to increase the company's profit. Looking ahead, the company's actual pulp costs are slowly increasing. If the company's 2H24 price increase is sustainable, and the company's homemade pulp production capacity is implemented, we think the company is expected to hedge part of the cost pressure and expand the pulp-paper scissor gap.
2024 will enter a major year of production expansion, and Hubei+Guangxi will support mid-term growth. According to the company's announcement, the Hubei and Guangxi projects have gradually entered the first phase of equipment installation and commissioning, and are scheduled to be put into operation in early 2024. Among them, Hubei took the lead in implementing two chemical machine pulp lines and two paper production lines (about 160,000 tons of paper+200,000 tons of pulp), and the Guangxi base plans to take the lead in landing 200,000 tons of machine pulp, then land on paper and chemical pulp production capacity. The company is gradually promoting the “integrated pulp and paper” construction in Hubei+Guangxi. We estimate that in 2024, the company's output is expected to grow to more than 1.3 million tons (up more than 20% year on year), increase CAGR 10% + in mid-term production energy, develop a rich product matrix of new categories, and continue to verify the advantages of the “forest-pulp-paper” industry chain.
Profit forecasting and valuation
We maintain a net profit forecast of 1.1 billion yuan for 2024 and introduce a net profit forecast of 1.3 billion yuan for 2025. The current price is 12x and 10x for 2024-25e P/E; we maintain the outperforming industry rating and target price of 27 yuan, and the target price for 2024-25e P/E is 17x and 15x, implying 49% upward space.
risks
Demand fell short of expectations; pulp prices fluctuated beyond expectations; new supply exceeded expectations.