Introduction to this report:

Empowered by the deep layout of upstream resources, the upward trend in profit gradually became clear, and management and governance advantages were further established.

Key points of investment:

The target price was raised to 19.9 yuan to maintain the “gain” rating. Company 24Q1's performance exceeded expectations. Considering the strong trend in the company's performance, we raised the company's profit to be 1.33/1.53/1.68 yuan (original value 1.28/1.47/1.62 yuan) in 2024-2026. Referring to the industry valuation level, considering the valuation premium given by the company's in-depth layout of upstream resources, the company was given 15xPE in 2024, and the target price was raised to 19.9 yuan (previous value 19.2 yuan), maintaining the “gain” rating.

Q1 Production and sales are strong. The production of cultural paper 24Q1 increased steadily, mainly due to the renovation and optimization of Nanning Unit 1. During the peak bidding season for teaching aids in March-April, publishing house tenders continued, and cost pressure drove paper mills to actively support the market. According to Zhuochuang Information, the average price of double adhesive paper in April was +98 yuan compared to February.

The Q1 production of boxboard paper increased year-on-year. This means that a new paper machine was put into operation in Nanning. There is a shutdown guarantee before the holiday season, low- and mid-range prices fluctuate, high-end prices are strong, and profits are expected to be steady.

Profit increases month-on-month, costs rise, or catalyze continued price increases. The 24Q1 gross profit margin was 18.0%/9.4%, +0.9%/+0.2% month-on-month. Driven by supply-side disturbances and improved demand in Europe and the US, Arauco prices continued to rise in May. Currently, domestic spot prices are reluctant to sell at low prices. With the arrival of high-priced pulp in Hong Kong, the cost center will move up, which is expected to drive up prices. The supply and demand pattern of cultural paper is excellent, and price transmission is smoother. Furthermore, profits from businesses such as dissolved slurries and chemical slurries are expected to benefit from the upward cycle in propeller prices.

The upstream advantage is deepened, and the dividend rate is increased. By the end of '23, the company's pulp and paper production capacity had exceeded 12 million tons. In addition, forward-looking wood chip resources, the Laotian base owned an area of 60,000 hectares of pulp forest.

In 2023, the dividend ratio is 27%, and the dividend rate is 2%. Currently, the vertical industrial chain has been completed, and a horizontal multi-base collaborative layout has been formed to maintain appropriate capital expenditure while increasing the dividend rate.

Risk warning: Prices of raw materials continue to rise, downstream consumer demand falls short of expectations, etc.