2Q24 results are in line with our expectations

The company announced 1H24 results: 1H24 achieved operating income of 3.43 billion yuan, +21% year-on-year; net profit to mother was 0.232 billion yuan, turning a year-on-year loss into a profit. Among them, 2Q24 achieved operating income of 1.71 billion yuan, +8% year-on-year; net profit to mother of 0.099 billion yuan, which is in line with our expectations. Comment: 1) 2Q sales declined slightly:

1H24's paper production and sales volume were 0.581 million tons (+21% year over year) and 0.566 million tons (+33% year over year). We estimate 2Q24 sales volume of about 0.28 million tons (slight decrease from month to month); 2Q tonnage prices only rose slightly from month to month, and the increase in specialty paper came to an end, but food card prices were still weak. 2) Net profit per ton decreased month-on-month: The company's actual cost of using tons of pulp increased month-on-month, exceeding the increase in the price of tonne paper, suppressing the company's profit performance in tons of paper. We estimate that the company's net profit for 2Q24 tons is around 350 yuan/ton, and the core source of profit contribution is glassine paper; the 0.3 million ton pulping machine at the Jiangxi base is expensive during the climbing phase, and the cost advantage has not yet been unleashed. 3) Improved cash flow, high capital expenditure: 1H24's net cash flow from operating activities was 0.22 billion yuan, and capital expenditure was 1.31 billion yuan, a high year-on-year increase. The main reason was that the company promoted the construction of new projects in Hubei. Earlier, the company announced that the Hubei base plans to invest 10 billion yuan. We judge that the cash flow and liabilities for the next two years are still under pressure; the company's balance ratio is 71%.

Development trends

3Q24 price stability is the key, and 4Q24 profits may recover month-on-month. We believe that 3Q24's inventory costs may continue to rise, compounded by weak demand, and the lack of sustainability in paper price increases. Under the cost impact, the third quarter may be the quarter with the greatest profit pressure in the whole year; looking ahead, along with the company's pulp and paper production capacity climbing and inventory costs falling sequentially in the fourth quarter, we estimate that 4Q24's performance will recover month-on-month.

Driven by bulk paper+specialty paper, Hubei's new production capacity dragged down profits in the short term. The company invested 0.3 million tons of new pulp to gradually climb the slope. Short-term production costs are high, and the cost dividend has not yet been released. Looking ahead, this stripped machine pulp matches the demand for cultural paper+food cards in Jiangxi. We are optimistic that the cost advantage of the core category will be further consolidated. In recent years, the company has accelerated the construction of new bases and category expansion: in 2023, the company added 0.022 million tons of transfer printing paper, 0.3 million tons of machine pulp, 0.018 million tons of drawing paper, and 0.035 million tons of industrial lining paper through acquisitions. By the end of 2023, the company had a raw paper production capacity of 1.416 million tons and a pulp production capacity of 0.3 million tons; 1H24's Hubei base industrial wrapping paper (0.3 million tons) Trial production of (million tons) and yarn tube paper (0.07 million tons). Recently, the company's third industrial wrapping paper in Hubei (0.3 million tons) is also in trial operation. By the end of the year, the company's raw paper production capacity is expected to exceed 2 million tons (+40% compared to the same period), but currently both supply and demand in the wrapping paper market are weak. We believe that the short-term climbing phase has dragged down the performance.

Profit forecasting and valuation

Considering the short-term drag on performance due to additional production capacity, we lowered the 2024-2025 EPS by 8%, 5% to 1.27 and 1.48 yuan, and the current price is 10x and 8x for 2024-25 P/E; we maintained the outperforming industry rating. Considering the decline in risk appetite in the papermaking sector in the third quarter, the target price was lowered by 25% to 15 yuan. The target price corresponding to the 2024-25 P/E is 12x and 10x, implying 25% upward space.

risks

Demand fell short of expectations; pulp fluctuated beyond expectations; new production capacity dragged down performance; cash flow deteriorated.