Key points of investment:

The company announced the 2023 Annual Report and the 2024 Quarterly Report, and the performance was in line with expectations. 2023 Annual Report: Revenue in 2023 was 29.333 billion yuan, down 13.8% year on year, net profit from mother was 156 million yuan, up 106.9% year on year; of these, Q4 revenue was 8.021 billion yuan, down 6.3% year on year, and net profit to mother was 273 million yuan, turning a loss year on year into profit, up 76.2% month on month. Net operating cash flow inflow in 2023 was $3.167 billion, up 1457.2% year on year; of these, 2023Q4 net operating cash flow inflow was $1,249 billion, up 1308.5% year on year. 2024Q1: Achieved revenue of 6.669 billion yuan, a year-on-year increase of 5%, net profit attributable to mother of 39 million yuan, turning a year-on-year loss into a profit, a year-on-year decrease of 85.7%. The net operating cash flow inflow of 2024Q1 was 460 million yuan, an increase of 26.5% over the previous year, and the cash flow performance was excellent.

The price of corrugated box board rebounded after August 2023, which led to an improvement in the company's profit. In 2023, the company achieved revenue of 112.31/42.76/37.35/70.80/21.24 billion yuan respectively, with year-on-year changes of -12.3%/-5.5%/-16.6%/-7.8%/-42.8%, respectively. The sales volume of raw paper during the same period was 6.7773 million tons, an increase of 10.0% year-on-year. Box board corrugated paper is mainly used for consumer goods packaging, and is partly exported indirectly in the form of commodity outer packaging. The domestic economy and export performance in 2023 suppressed the demand for box board corrugated paper. Furthermore, due to tariff relief on imported paper at the beginning of the year, the import volume of box board corrugated paper increased markedly in 2023, further suppressing the price of paper. According to Zhuochuang Information, the average price of box board paper/corrugated paper in 2023 was 3947/2914 yuan/ton, respectively, down 16.5%/18.8% year on year. Since the second half of 2023, box board corrugated paper has gradually entered the peak demand season. Combined with downstream paper mills, paper prices have rebounded. The average price of 2023Q1/2/3/4 box board paper was 4262/3945/3748/3843 yuan/ton, respectively, and the average price of corrugated paper was 3126/2848/2763/2927 yuan/ton respectively. 2023Q4 paper prices bottomed out and rebounded, helping the company improve profits in 2023Q4.

The packaging business adheres to the big customer strategy, increases the proportion of the carton business, and increases profitability against the trend. In 2023, on the basis of consolidating the existing core business circuit, the company vigorously expanded the share of high-potential customers in various industries and developed orders from major customers in the daily chemical, FMCG, food and other industries. The share of sales orders of the Group's major customers in the packaging sector increased to 42% in 2023, an increase of about 9 pcts over the previous year. In addition, the share of the carton business in the packaging sector was further increased in 2023, and the carton board business structure was continuously optimized.

The company is actively expanding the industrial paper and plastic business, building four industrial paper and plastic bases in Putian, Zhuhai, Jiashan and Vietnam. The scale has reached the middle and upstream level of the industry, consolidated the food paper and plastic business, provided customers with environmentally friendly tableware products using bamboo pulp and sugar cane pulp as the main raw materials, further increasing the market share of the company's high-margin circuit. In 2023, the paper products business achieved revenue of 7.080 billion yuan, down 7.8% year on year, and paper products sales volume was 2,066 billion square meters, down 3.3% year on year, but gross margin reached 13.4%, up 2.7 pct year on year.

Paper production capacity ranks second in the industry, and there is great upward flexibility. With the completion and commissioning of the Zhejiang Shanying 770,000 ton papermaking project and the Jilin Shanying Phase I 300,000 ton corrugated paper project, the company has developed a layout advantage of over 8 million tons in the core regions of East China, South China, and Central China, ranking second in the box board corrugated paper industry. Furthermore, through cooperation and self-construction, the company achieved an overseas supply of about 900,000 tons/year of recycled pulp, supporting various papermaking bases to build 500,000 tons of bamboo and wood fiber production capacity, replacing high-quality domestic waste and long fiber external waste resources, and creating an integrated advantage in the industrial chain. The box board corrugated paper industry is currently at the bottom. The profit base is low. Leading manufacturers are gradually slowing down production capacity investment, and supply and demand are expected to improve. If there is an inflection point in the future, the company's production capacity ranks second in the industry, and upward flexibility is high.

Expenses were strictly controlled, and the cost rate improved during the period. The company's expense rate for the 2023 period was 12.6%, up 1.8 pct year on year. Among them, the cost rate for the single Q4 period was 11.8%, down 1.7 pct year on year, and the cost rate during 2024Q1 was 12.5%, down 2.9 pct year on year. Looking at the spin-off, the company's 2023 sales/management/R&D/finance expense ratios were 1.3%/4.8%/2.9%/3.6%, respectively, with year-on-year changes of +0.1/+0.2/+0.4/+1.1pct; single 2023Q4 company's sales/management/R&D/finance expense ratios were 1.2%/4.7%/2.8%/3.1%, respectively, with year-on-year changes of -0.2/-0.5/+0.2/-1.3 pct, respectively, 2024Q1's sales/management/ R&D/finance expense ratios were 1.3%/ 4.4%/2.7%/4.1%, year-on-year changes of -0.1/-1.7/-0.3/-0.7pct, respectively. Expense rates increased during 2023, mainly due to a significant decline in revenue. Sales and management expenses decreased by 185 million yuan year-on-year in 2023, and core management took the initiative to cut salaries in the second half of the year to further help control expenses. All 2024Q1 fee rates were reduced year on year, and the cost control effect was evident.

Profits in the box tile paper industry are expected to bottom up. The company is steadily in the first tier of the industry, focusing on the main papermaking industry and extending the industrial chain vertically to further create a local advantage, continue to expand production capacity, and build a driving force for long-term growth. Considering the current low boom in the box board corrugated paper industry, we lowered the company's 2024 net profit forecast to 883 million yuan (previous value was 1,275 million yuan), added the 2025-2026 net profit forecast of 10.42/1,319 billion yuan, and increased 465.4%/17.9%/26.6% year-on-year in 2024-2026, respectively, corresponding to 2024-2026 PE 9/8/6X, respectively. The company's stock price has experienced a full correction in the previous period. Currently, the valuation is still cost-effective compared to peers. Refer to comparable companies. Sun Paper and Bohui Paper had an average PE valuation of 12.1X in 2024. Currently, the market capitalization still has room to rise by 27.6%, maintaining a “buy” rating.

Risk warning: There is an oversupply of new papermaking capacity, and terminal consumer demand is slowly recovering.