Incidents:

The company released its 2024 mid-year report, achieving revenue of 3.43 billion yuan, a net profit of 0.23 billion yuan year-on-year, and a year-on-year net profit of 0.23 billion yuan, and net cash flow from operating activities of 0.22 billion yuan, which changed from negative to positive; of these, 2Q2024 achieved revenue of 1.7 billion yuan, +7.7% year-on-year and -1.2% month-on-month, achieving net profit of 98.57 million yuan, +457.5% year-on-year and -26.3% month-on-month.

Comment:

New production capacity continued to be released, and both production and sales increased rapidly in the first half of the year: in 2023, the company's Zhejiang base added 0.022 million tons of digital transfer paper production capacity, the Jiangxi base added 0.018 million tons of drawing paper production capacity, and added 0.035 million tons of industrial liner production capacity through the acquisition of Wuzhou Special Paper (Longyou) Company. The above additional production capacity continued to be released in the first half of this year. Furthermore, the 0.5 million tons of food packaging capacity in Jiangxi, which the company put into operation at the end of 2021, is still climbing. The driving company's production and sales grew rapidly. 1H2024 completed machine paper production of 0.581 million tons and 0.566 million tons of sales, +20.6%/+32.8% year on year, respectively. The average price per ton was 6061 yuan, and -605 yuan year on year. The increase in sales volume of products such as food wrappers and consumer products has driven 1H2024's revenue scale to expand significantly year-on-year.

As of 1H2024, the company has 15 production lines, with a total design capacity of 2.096 million tons, including 0.78 million tons of food wrapping paper, 0.301 million tons of daily consumption series, 0.3 million tons of cultural paper, and 0.035 million tons of industrial supporting materials series.

Food card prices declined and wood pulp costs rose, and profitability declined slightly in the second quarter: 1H2024's gross margin was 12.1%, +6.8pcts year over year, of which 1Q/2Q2024 company's gross margin was 13.0%/11.2%, +9.5/+4.5 pcts year over year, respectively, and 2Q gross margin -1.7 pcts month-on-month, respectively.

According to Zhuochuang News data, the average price of 1Q/2Q2024 paper cup base paper per ton was 7100/6906 yuan, respectively, -28/+369 yuan, 2Q2024 was 194 yuan month-on-month, 1Q/2Q2024 broadleaf pulp average price was 5184/5667 yuan, -716/+1,463 yuan year-on-month, and 2Q2024 was +483 yuan month-on-month. We believe that in addition to the reduction in food card prices, 2Q2024's gross margin was also affected by the increase in wood pulp inventory costs.

The 1H2024 company's cost rate for the period was 4.8%, +0.5pcts year on year. Among them, the sales/management/R&D/finance expenses ratio was 0.2%/1.4%/1.6%/1.7%, respectively, flat year-on-year, flat /+0.1pcts/+0.4pcts, respectively. The company's expense ratio for the 2Q2024 period was 4.8%, +0.3 pcts year over year. Among them, sales/management/R&D/finance expenses rates were 0.2%/1.3%/1.6%/1.6%, respectively, -0.1/+0.3/+0.2/-0.2 pcts year on year, respectively.

Pulp and paper integration is progressing steadily, maintaining a “purchase” rating: Looking ahead to the future market, the company's Hubei base's 0.35 million ton corrugated paper production capacity was successfully put into operation in early August this year, and another industrial wrapping paper production line will be put into trial operation in early 2025. In terms of pulping, the 0.3 million ton pulp production capacity of the company's Jiangxi base was put into operation in March of this year, basically achieving complete self-sufficiency in machine pulp required for food white cards and cultural paper. At the same time, the 0.6 million ton chemical pulp project continues to advance. It is expected that by the end of 2025, the company's total production capacity will double, the degree of pulp and paper integration will be greatly increased, and profit certainty will be further enhanced. We basically maintain the company's net profit forecast for 2024-2026, which is 0.56/0.72/0.85 billion yuan, respectively. The current stock price corresponds to PE 9/7/6 times, respectively. Maintain a “buy” rating based on the company's current valuation level and future performance growth.

Risk warning: The price of wood pulp fluctuates beyond expectations, the investment of new production capacity falls short of expectations, and the level of market competition exceeds expectations.