1Q24 results slightly exceeded our and market expectations
The company announced 1Q24 results: achieving revenue of 2.21 billion yuan, +20% year on year; net profit to mother of 269 million yuan, +120% year on year, deducted non-net profit of 237 million yuan, +106% year over year, including government subsidies of 0.3 million yuan. The performance slightly exceeded our and market expectations, mainly due to low inventory costs and net profit performance of tons slightly exceeding expectations. Comment: 1) Special paper sales are rising steadily, and white card production is running low: 1Q24 achieved total sales of ~250,000 tons, an increase of more than 30% over the previous year. Among them, supply and demand in the white card market are both weak, and the company actively controls white card production and sales to reduce risks. We estimate that white card sales are within 30,000 tons. 2) Xia Wang's net profit level is stable: Considering the Spring Festival shutdown and maintenance losses, we estimate that 1Q Xia Wang's sales volume was within 80,000 tons, corresponding to a net profit of around 1,100 yuan per ton, which remained high overall, but there was a significant decrease compared to 3Q23 tons of net profit. We think the main reason was the price reduction for middle- and low-end products. 3) There was a slight drag on impairment: 1Q24 calculated a total of 29 million yuan in impairment, compared to 11 million yuan in the same period last year. The main source was the impairment of raw material inventories. 4) Net interest rate increased slightly month-on-month: The company's net interest rate in 1Q24 was 12.2%, 0.2ppt month-on-month. The main reason is that some prices have recovered slightly since March and the cost side is relatively stable. We believe that the price increase since March will mainly be reflected in 2Q, and we are optimistic that 2Q profit margins will continue to recover month-on-month. 5) Peak capital expenditure period: Net operating cash flow reached -410 million yuan. We believe it was mainly due to centralized payments; capital expenditure was 1.34 billion yuan, a significant increase over the previous year, mainly due to the acceleration of production capacity expansion in Guangxi and Hubei. The balance ratio was 63%, compared to the end of 2023.
Development trends
The increase in specialty paper prices supported continued recovery in 2Q24. Looking ahead to 2Q24, the company has increased various types of paper by varying degrees since March. Among them, heat transfer paper and glassine paper have achieved good results (the two types of products account for ~ 40% of sales), which we believe is expected to support 2Q results; the company actively controls white card loss risk exposure and actively lays out the layout of coated high-value-added products. We estimate that the annual loss margin has narrowed significantly year-on-year. 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 against some cost pressure and continue to expand the pulp-paper scissor gap in the second half of the year.
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 keep our 2024-2025 net profit forecast unchanged. The current price corresponds to 2024-25e P/E at 12x and 10x; we maintain our outperforming industry rating and target price of 27 yuan, and the target price corresponding to 2024-25e P/E is 17x and 15x, implying 45% upward space.
risks
Demand fell short of expectations; pulp prices fluctuated beyond expectations; new supply exceeded expectations.