Event: Sun Paper released its report for the first quarter of 2024. In 2024Q1, the company achieved operating income of 10.185 billion yuan, up 3.87% year on year; net profit to mother was 956 million yuan, up 69.04% year on year; net profit after deduction was 952 million yuan, up 72.22% year on year.

The overall price of 24Q1 cultural paper is resilient, and the popularity of dissolved pulp is high 1) Cultural paper: According to Baichuan Yingfu data, the average price of 24Q1 double adhesive paper/coated paper was 5739/5816 yuan/ton, respectively, up -12.16%/0.52% year on year, respectively, up -13.30%/0.11% month-on-month, respectively. A lot of new production capacity was added in 24Q1. Prices were added in January, but demand picked up after the Spring Festival. Party and government paper orders provided some rigid support. Leading companies firmly sent letters to push up, compounded with stronger pulp price support. The cumulative increase in double adhesive paper Q1 from various leading companies was about 300 yuan/ton. Looking ahead to Q2, the supply of cultural paper continues to ease, but publishing orders and demand for party and government paper have bottomed out. As of mid-April, pulp prices continued to strengthen. Recently, cultural paper tenders have begun one after another. It is expected that the overall price of cultural paper will remain flat month-on-month compared to Q1, and decline slightly with the end of the peak season. 2) Box board paper: The average price in 24Q1 was 4,053 yuan/ton, down 9.16% year on year and 15.20% month on month. Demand recovery is limited, and the conflict between supply and demand still exists, but the impact of maintaining a stable import volume is manageable. Along with the rebound in the price of waste paper, prices are expected to stop falling. As we enter the traditional peak season in the second half of the year and the economy gradually recovers, demand for wrapping paper is expected to improve. 3) Dissolved slurry: The average price was 7,454 yuan/ton, up 2.03% year on year. Demand was good in the first half of the year. Supported by stronger pulp prices, the price of Q1 dissolved slurry increased steadily year on year, supporting the upward trend in pulp prices. It is expected that Q2 dissolved slurry prices will continue to strengthen, and the dissolved slurry production capacity of the company's Shandong Zoucheng plant and Laos base has been fully released.

The growth rate of capital expenditure has slowed down, and the dividend ratio is expected to increase again in the future. By the end of 2023, the planting area of the pulp forest at the Lao base has reached 60,000 hectares. In the next few years, the company plans to steadily advance the planting scale by adding 1-12,000 hectares each year, and will gradually increase planting efforts. Currently, the area planted by self-managed forests and people's cooperative forests at the Laos base is about 50% each. The company expects that along with the planting effect of local residents, their enthusiasm will gradually increase, and the planting area of people's cooperative forests will also increase accordingly. The company's “three major bases” have achieved high-quality collaborative development, made up for shortcomings in strategic location layout, perfected the scientific layout on the market side, and steadily built Sun Paper's “integrated forest pulp and paper” industry chain, making the company have strong core competitiveness in the industrial chain and is more capable of ironing out cyclical fluctuations in the industry. In April '24, the company announced that the Nanning Phase II project will build a 400,000 tons/year specialty paper production line, 350,000 tons/year bleached chemical wood pulp production line, 150,000 tons/year mechanical wood pulp production line and related supporting facilities, with a total investment of no more than 7 billion yuan.

Currently, the focus is on the first and second phase of the forest pulp and paper project in the Nanning Park at the Guangxi base, as well as some layout optimization projects such as technical reform and relocation. It is estimated that in the next two years, the annual capital expenditure will be around 4 billion yuan, and the balance ratio will be controlled at around 50%. At the same time, the company has issued Sun Paper's “Dividend Return Plan for the Next Three Years (2024-2026)”, which will steadily increase the dividend ratio while profits are stable.

Profitability continued to increase month-on-month in 24Q1. The integrated advantages of forest pulp and paper showed profitability. In 2024Q1, the company's gross margin was 17.99%, an increase of 4.48pct over the previous year.

According to wind data, the average price of 24Q1 broadleaf pulp/coniferous pulp was 667/754 US dollars/ton, respectively, down 18.60%/17.12% year on year, respectively, and 5.40%/-20.56% month on month, respectively. The gross margin increased sequentially in 24Q1. We mainly analyzed the price of raw materials such as wood chips, the decline in energy costs, the overall stability of cultural paper prices, and the release of profits from low-price pulp stocks. The company expects the profit level of cultural paper to remain stable in 2024Q2, and the impact of the rise in pulp prices will be felt starting in 24Q3.

In terms of period expenses, the 24Q1 company's expenses rate was 6.77%, down 0.32pct year on year; sales/management/R&D/finance expense ratios were 0.43%/2.38%/2.14%/1.82%, respectively, up +0.06/-0.13/-0.05/-0.21pct, respectively. Under the combined influence, 2024Q1's net interest rate was 9.41%, up 3.61 pct year-on-year.

Investment advice: Sun Paper is the leading high-quality white horse in the paper industry. The company's pulp and paper production capacity is expanding steadily, and continuous growth can be expected in the medium to long term. We expect Sun Paper's revenue in 2024-2026 to be 435.37, 458.54, and 48.546 billion yuan, up 10.10%, 5.87% year-on-year; net profit to mother will be 36.55, 41.97, and 4.907 billion yuan, up 18.46%, 14.81%, and 16.92% year-on-year, corresponding PE of 12.1x, 10.5x, 9.0x, and give 2024 15.7xPE, with a target price of 20.54 yuan, maintaining a buy-A investment rating.

Risk warning: Risk of downstream demand falling short of expectations, risk of large fluctuations in raw material prices, risk of repeated epidemics, risk of capacity construction falling short of expectations, risk of acquisition results falling short of expectations.