The company released its 2024 quarterly report: 2024Q1 achieved revenue of 10.185 billion yuan (+3.9% YoY), net profit of 956 million yuan (YoY +69.0%), after deducting net profit of 952 million yuan (YoY +72.2). Q1 Pulp prices continued to rise, cultural paper price increases steadily, and the company's profit performance was impressive.

Wood pulp system: Pulp prices are running high, and cultural paper price increases have been steadily implemented. According to Zhuochuang information, the 2024Q1 wood pulp market price was -2.2% month-on-month, and the price of double adhesive paper/coated paper was -5.4%/-3.1%, respectively. Since March, the pulp price continued to rise. The price of wood pulp in March rose 4.3% from January to January, compounded the peak season for cultural paper to catalyze an increase in downstream demand and a steady rise in paper prices (currently double glue/coated paper had a lower increase of 8.6%/13.1%). Currently, pulp prices continue to be strong. Compared to the previous round, Arauco softwood pulp and broadleaf pulp prices were +40 US dollars/ton and +30 US dollars/ton respectively. There is still strong support on the cost side. It is expected that cultural paper prices will stabilize in the future.

Waste paper department: Waiting for demand to recover, profits are expected to be released. According to Zhuochuang information, the 2024Q1 domestic waste price was -3.8% month-on-month, and the price of boxboard/corrugated paper was -0.3%/-2.5% month-on-month, respectively. In 2023, 1 million tons of high-grade wrapping paper were successfully put into operation in the first phase of the company's Nanning project. The profit performance was steady. Considering that the increase in boxboard corrugated paper production capacity in the 2024 market was limited, and the current paper price has basically absorbed the impact of zero tariffs on imported paper. Following a recovery in downstream consumption, the company's production capacity continues to rise, and subsequent profits are expected to continue to be released.

The Nanning project is progressing steadily, and the integration of forest pulp and paper can be expected. As of 2023, the company's total production capacity exceeded 12 million tons, of which the total production capacity of pulp and paper reached 5 million tons and 7.14 million tons respectively. Furthermore, follow-up investment for the second phase of the Nanning project is clear. The plan is to build production lines of 400,000 tons of specialty paper, 350,000 tons of chemical pulp, 150,000 tons of chemical pulp and related supporting measures. The total investment of the project is expected to be no more than RMB 7 billion, and growth is steady in the medium term.

Profits have been steadily improved, and cost control has been optimized. 2024Q1 has a gross profit margin of 18.0% (+4.5pct YoY, +0.9pct month-on-month), a net profit margin of 9.4% (YoY +3.6pct, +0.2pct month-on-month), with price increases for benefiting products steadily, and profitability continued to increase; on the cost side, the Q1 period expense ratio was 6.8% (-0.3pct YoY), of which the sales/management/R&D/finance expense ratios were 0.4%/2.4%/2.1%/1.8% (+0.1pct-month-on-month +0.1pct/-, respectively) 0.2pct). In terms of dividends, the company plans to increase the distribution from 2 yuan for 10 shares (dividend ratio 19.9%) to 3 yuan for 10 shares (dividend ratio 27.2%). Subsequent dividends are expected to rise steadily along with improved profits and reduced capital expenditure.

Cash flow is under slight pressure, and operating capacity is stable. 2024Q1's operating cash flow was 586 million yuan (year-on-year - 1,037 million yuan). Cash flow was under pressure, mainly due to an increase in cash payments for goods and services and an increase in accounts receivable balances. As of the end of 2024Q1, the company's inventory turnover days were 48.04 days (year-on-year -5.65 days), accounts receivable turnover days were 23.48 days (year-on-year -1.65 days), and accounts payable turnover days were 44.46 days (+1.89 days year over year).

Profit forecast and investment rating: We expect the company's net profit to be 38.2 billion yuan, 45.2, and 4.88 billion yuan respectively in 2024-2026, corresponding to PE of 11.4X, 9.6X, and 8.9X, maintaining a “buy” rating.

Risk warning: Demand recovery falls short of expectations, costs fluctuate beyond expectations, and production capacity investment falls short of expectations.