Incident: The company released its 2024 semi-annual report. 2024H1 achieved revenue of 3.43 billion yuan, +21% year-on-year, and net profit of 0.23 billion yuan, reversing year-on-year losses; of these, Q2 achieved revenue of 1.7 billion yuan in a single quarter, +8% year-on-year, and net profit of 0.1 billion yuan, or +458% year-on-year.

Periodic fluctuations in wood pulp, combined with the concentrated investment of new production capacity in the industry, are expected to drive the clearance of small and medium-sized production capacity.

2024H1 Demand for most specialty paper products is improving, and price increases have been successfully implemented. Sales prices for a small number of products (such as white cards) have weakened due to large new production capacity, and profit levels are under pressure. Looking ahead to the second half of the year, considering the introduction of new domestic and foreign pulp production capacity in 2024Q3, there is little upward pressure on pulp prices, which is beneficial to paper mill cost control. In addition, cyclical fluctuations in wood pulp, combined with the centralized investment of new production capacity by leading manufacturers, are expected to speed up the clearance of small and medium-sized production capacity within the industry. Leading companies may rely on advantages such as technology, brand, customer, and cost, which may catalyze a further increase in industry concentration and obtain better market pricing rights.

Homemade machine pulp was put into production, and the integrated layout of pulp and paper was first developed. The company's Jiangxi base pulp production line was officially put into use in early 2024. Along with rising production capacity and formula optimization, it has now basically achieved self-balance in the use of food wrapping paper and cultural pulp paper, which not only saves costs in the production of existing products, but also provides a raw material guarantee for the optimization and adjustment of the company's product structure.

Gradually enrich the product matrix through mergers and acquisitions and self-construction. The company increased the production of industrial lining paper through technical reforms at the Longyou factory. Furthermore, the first phase of construction of the Hubei base was basically completed, and a series of industrial wrapping paper products were officially put into operation. Up to now, the company has three major papermaking bases in Quzhou, Jiangxi and Hubei. The total production capacity of paper and pulp exceeds 2.39 million tons. The three bases have developed collaboratively, and the scale of production capacity has expanded in an orderly manner.

Profit forecast and rating: We are optimistic that the company's integrated pulp and paper layout is progressing steadily, new production capacity continues to be released, and the product structure is diversified. The company's net profit for 2024-2026 is 0.54 billion yuan, 0.7 billion yuan, and 0.86 billion yuan, respectively. The corresponding PE is 9x, 7x, and 5x, maintaining the “recommended” rating.

Risk warning: downstream demand falls short of expectations; fluctuating raw material prices; increased industry competition, etc.