2Q24 results are basically in line with our expectations

The company announced 1H24 results: operating income of 20.5 billion yuan, +6.11% year on year; net profit to mother of 1.76 billion yuan, +40.5% year on year; 2Q24 net profit of 0.802 billion yuan, +17% yoy/-16% month-on-month, in line with our expectations. Comment: ① Cultural paper: Peak season market+ton pulp cost increased slightly month-on-month. We estimate that 2Q company's net profit per ton of cultural paper was 400 yuan+, a slight decrease from month to month; we judged that the 3Q ton pulp cost increase + 0.45 million ton production capacity investment at the end of the year. The increase in paper prices was not strong, and the net profit for tons of paper was slightly lowered. ② Box board paper: 1H24 US waste prices have risen. We estimate that the net profit of the Lao base is weak, and the reduction in domestic paper prices also dragged down the net profit of the first half of the year. Looking ahead, considering the possibility of price increases during the peak packaging season in the second half of the year and the optimization of the production line structure in Nanning, Guangxi, we estimate that the net profit of 3Q tons of paper will recover smoothly. ③ Dissolved slurry: Thanks to a better supply and demand pattern, the internal price of 2Q dissolved pulp remained 7,700 yuan/ton. It did not follow the sharp decline in pulp prices, and the overall profit per ton remained high; looking ahead, we are optimistic about the price toughness of 2H24 dissolved pulp, which supports the high net profit operation of tons of pulp. ④ Other export pulp: Pulp prices have declined to a high level since 2Q. We expect the company's export pulp sector's profit to decline quarterly in 2Q 24, but at the same time, the company's export sales are mainly aimed at the Group, and fluctuations are weak. ⑤ The balance sheet quality is excellent, and asset impairment is hampered in the short term: 1H24 illiquid asset disposal profit and loss - 0.087 billion yuan, mainly due to the Nanning base. We suggest that the Nanning base is an early acquisition project. The facilities are old, and the risk of impairment will still exist during the construction of new projects in the next few quarters; 1H24 operating cash flow is 3 billion yuan; capital expenditure is 2.4 billion yuan; and the balance ratio is 47%.

Development trends

The 3Q24 performance is under month-on-month pressure, and we are optimistic about a steady recovery in the 4Q. The company released 1 million tons of cardboard in 2023. In addition, the superimposed company expects to start producing 0.15 million tons of household paper in 3Q24. We estimate that the company's annual paper sales will increase 10% + year over year; the company announced that the Nanning Phase II project plans to add 0.4 million tons of specialty paper +0.35 million tons of chemical pulp +0.15 million tons of machine pulp. Shandong has begun construction of 0.037 million tons of new specialty paper-based materials and 0.14 million tons of special paper project. We expect capital expenditure to remain high in 2024-25, and the company needs to reserve sufficient cash for endogenous growth. Furthermore, we estimate that inventory costs will rise in 3Q24. Currently, demand is weak, and price increases are not sustainable. We estimate that 3Q tons of paper profits will weaken month-on-month, and stabilizing paper prices is the main strategy for the third quarter; while 4Q24 price increases and low inventory slurry is stored, tonne paper profits are expected to stabilize month-on-month.

The integration of forest pulp and paper continues to improve. Currently, the company's paper+pulp production capacity exceeds 12 million tons. It is the only company in China that has achieved “forest-pulp-paper” integration and full range of papermaking coverage. In the short and fast cycle of the paper industry, Sun Paper has repeatedly proved to the market that its strategy is forward-looking, its ability to expand against the trend cycle, and obtain sustainable cumulative cost advantages through its own cost reduction. Looking at the medium term, the company has high-quality locations in Shandong & Guangxi, and is equipped with Lao woodland resources and high-quality fiber. We are optimistic that the company's cost advantages will continue to accumulate.

Profit forecasting and valuation

Taking into account the drag of asset depreciation, we lowered our 2024-25 net profit by 13%, 18% to 3.2 billion yuan, and 3.5 billion yuan, and the current price is 10.4x and 9.7x for 2024-25e P/E; we maintain the industry performance rating. Considering that the company deepens the cost advantage of integrating high-quality white horses and pulp and paper, we maintained a target price of 18 yuan, and the target price corresponding to 2024-25e P/E is 16x and 15x, implying 49% upward space.

risks

Demand fell short of expectations; costs fluctuated beyond expectations; additional capacity fell short of expectations.