Conclusions and recommendations:
The company is a leading integrated enterprise of forest pulp and paper in China. Its products cover a variety of paper products such as cultural paper, box board paper, household paper, etc. At the same time that the price of 2024H1 pulp is strengthening, the price of paper products falls, and the profits of paper companies will be squeezed, and the company's business resilience has been highlighted for many years in upstream fields such as forestry and pulp. Considering that the current pulp and paper market has not improved significantly, investment suggestions for “ranged operation” are given for the time being.
Pulp prices rose in the first half of the year, and paper companies' profits will be affected: due to weak recovery in consumption, the effects of 2024H1 paper companies' price increase letters were not obvious. As of June 27, 2024, the prices of double adhesive paper and coated paper were down 6.5% and 3.1% respectively from the beginning of the year, while box board paper was still impacted by imported paper products under the “zero tariff” policy, and prices fell 8.9% from the beginning of the year. On the cost side, CFR prices of broadleaf pulp star and acerola pulp silver star rose by 18.5% and 7.7% respectively from the beginning of the year, mainly due to overseas supply contraction: 1) strikes in Finland and Canada occurred one after another, and transportation was blocked, which reduced the overall supply of pulp in the market; 2) demand for pulp in Europe rebounded. Among them, the cumulative consumption of open pulp from January to May increased 16% year-on-year, and the price of various types of pulp had a clear premium over the Chinese market, causing pulp mills to reduce the amount of wood pulp sent to China. Although some paper companies maintained high profit margins in 2024Q1 due to factors such as inventory cycles and pulp shipping schedules, we expect paper companies' profits to gradually be squeezed starting in Q2.
The company's pulp self-supply rate has reached 60%, and the integrated advantages of forest pulp and paper are prominent: the company has achieved remarkable results since entering Laos in 2008 to implement the integrated forest pulp and paper project. Currently, the total production capacity of the three major bases in Shandong, Guangxi and Laos exceeds 12 million tons, and the pulp self-supply rate has reached about 60%. The company's gross margin in 2022 and 2023 was higher than the industry's 3.6 and 5.1 pcts, respectively, effectively reducing the impact of wood pulp price fluctuations on the company. In terms of capacity construction, in April 2024, the company announced that it plans to implement the second phase of the Guangxi Nanning project. It will build a special paper production line with an annual output of 400,000 tons, a bleached chemical wood pulp production line with an annual output of 350,000 tons, a mechanical wood pulp production line with an annual output of 150,000 tons and supporting facilities. While enriching the product matrix, the company will further increase the self-supply rate of wood pulp. Looking forward to the future, according to Zhuochuang News data, there is a high possibility that the production capacity of 2024H2 will reach 2.55 million tons in Brazil and 1.8 million tons of broadleaf pulp in Fujian, China. However, considering factors such as exchange rate fluctuations and weak domestic bargaining power, we expect the 2024H2 pulp price decline to be limited, and the company's profit performance will continue to outperform the industry.
Profit forecast and investment suggestions: Due to the significant rise in 2024H1 pulp price, we slightly lowered our 2024 performance. We expect the company to achieve net profit of 3.41 billion yuan, 3.82 billion yuan, and 4.13 billion yuan respectively in 2024-2026 (previous forecasts were 3.51 billion yuan, 3.83 billion yuan, and 4.16 billion yuan, respectively), yoy is +10%, +12%, +8%, EPS is 1.22 yuan, 1.37 yuan, and 1.48 yuan. The current A stock price corresponds to PE 11 times, 10 times, and 9 times, respectively Double, considering that the current pulp and paper market has not improved significantly, the company was temporarily given an investment recommendation for “ranged operation”.
Risk warning: Market competition increases risk, raw material price fluctuation risk, demand recovery falls short of expectations