Event: The company released a performance forecast for the first half of 2024:2024H1 is expected to achieve net profit of 0.225-0.235 billion yuan (23H1 is -0.012 billion yuan), with a median value of 0.23 billion yuan; single Q2 is expected to be 0.091-0.101 billion yuan (+415.8% ~ +472.4%), and the median value is 0.096 billion yuan (+444.1% year over year); 2024H1 is expected to achieve net profit after deducting non-net profit 0.216-0.226 billion yuan (23H1 is -1.48 million yuan), median value is 0.221 billion yuan; single Q2 is expected to be 0.084-0.094 billion yuan (+560.1% ~ +638.3%), and the median value is 0.089 billion yuan (+599.2% YoY), calculated for us in the 2024Q2 section above. We expect the company's production and sales to be stable, costs will rise slightly, special paper price increases will be implemented, white card prices will fall, and performance will be stable.

Costs have risen, and tons of profit have declined slightly. Supply and demand in the white card industry are under pressure. We expect Q2's food card production and sales to shrink. Special paper will benefit from the peak season. We expect orders to be full, and overall sales are expected to remain flat month-on-month. In terms of price, we expect that daily consumer goods such as glassine and heat transfer will increase significantly, the average price of food cards is expected to decline month-on-month (24Q2 white card average price -7.2% month-on-month), and the average price of cultural paper will remain stable (24Q2 double adhesive paper/coated paper -0.1%/-0.9% month-on-month, respectively). We expect cost-side pressure to remain in Q2, with profit per ton under slight pressure. Looking forward to the future, white card prices will pick up at the bottom in early July. We expect special paper prices to consolidate at a high level, and the overall price market is expected to stabilize. Although high-priced pulp continues to be stored, the company is expected to ease cost pressure after producing and releasing its own pulp, and ton profit is expected to fluctuate at the bottom.

Horizontal and vertical layout, clear growth path. In 2023, the company launched 0.022 million tons of digital transfer paper and 0.018 million tons of drawing paper, and acquired 0.035 million tons of industrial liner production capacity at the end of 23Q3. By the beginning of April '24, the company's total production capacity had reached about 1.4 million tons; in 2024, Hubei Phase I industrial wrapping paper production line/a yarn tube paper production line is urgently needed to be put into operation recently. The remaining two industrial wrapping paper production lines will be put into trial production at the end of July 24 and the beginning of 2025, respectively; Total production capacity is expected to double, and the growth path is clear. Furthermore, 0.3 million tons of machine pulp production capacity continues to climb (mainly supplies food & cultural paper), and 0.6 million tons of chemical pulp has now been announced for the second time in the EIA. The process of integrating pulp and paper is being accelerated, which is expected to weaken the impact of the cycle.

Profit forecast: We expect the company's net profit to be 0.56, 0.71, and 0.86 billion yuan respectively in 2024-2026, corresponding to PE of 9.1X, 7.1X, and 5.9X, maintaining a “buy” rating.

Risk warning: Raw materials fluctuate, demand recovery falls short of expectations, food card competition intensifies, and production capacity falls short of expectations.