Incidents:

The company released its 2024 semi-annual report. The first half of 2024 achieved operating income of 20.524 billion yuan, +6.11% YoY, and realized net profit of 1.758 billion yuan YoY, +40.49% YoY, net net profit of 1.817 billion yuan, +49.17% YoY; net cash flow from operating activities was 3.026 billion yuan, -25.55% YoY; basic earnings per share of 0.63 yuan, +40.00%; weighted average return on net assets of 6.54%, YoY + 1.29pct

Among them, in 2024Q2, the company achieved operating income of 10.339 billion yuan, +8.41% year-on-year; realized net profit of 0.802 billion yuan, +16.94% year-on-year, after deducting non-return net profit of 0.865 billion yuan, or +30.01% year-on-year.

Investment highlights:

Increased production led to revenue growth, and 2024Q2 performance declined month-on-month.

Revenue growth in the first half of 2024 was mainly due to increased production. The company's total output of paper and pulp in the first half of the year was close to 5.8 million tons, an increase of about 20% over the same period last year. The increase was mainly due to the contribution of new production capacity and technical improvement projects in the Guangxi base Nanning Park. 2024Q2's performance declined somewhat month-on-month.

Revenue from the paper business increased, and several major business varieties grew.

In the first half of 2024, the paper business achieved revenue of 15.894 billion yuan, an increase of 11.27% over the previous year. By product, cultural paper, coated paper, kraft box board paper, corrugated paper, household paper, and coated base paper achieved revenue of 70.18, 21.20, 52.02, 0.07, 1.04, and 0.444 billion yuan, respectively, +7.27%, +34.29%, +14.12%, +528.89%, +15.44%, and -35.91%, respectively. In addition to the decline in revenue from coated base paper, the company's revenue from all other paper products showed a growing trend. According to Zhuochuang News, in the first half of 2024, the average prices of double adhesive paper, coated paper, kraft paper, corrugated paper, and household paper were -9.26%, +3.73%, -8.75%, -7.92%, and -7.47%, respectively, compared with the same period last year. Overall market prices were weak, and the company's revenue continued to rise, mainly due to increased production. In the first half of 2024, the company's cultural paper production reached a record high, with an output of nearly 1.8 million tons. In particular, coated paper production increased significantly. The company's coated paper turned a loss into a profit. Specialty paper performed well in optimizing costs and new product development. Kraft board paper continued to increase the proportion of high-end products in the Honghe factory area of the Shandong base. The Guangxi base Nanning factory continued to improve the structural adjustment of the product side and the raw material side and made efforts for high-end products. The wrapping paper production line at the Laos base remained stable.

Revenue from the pulping business declined, and the profit of dissolved pulp increased.

In the first half of 2024, the pulping business achieved operating income of 3.392 billion yuan, a year-on-year decrease of 13.31%.

By product, dissolved slurry, chemical slurry, and chemical slurry achieved revenue of 1.773, 0.829, and 0.79 billion yuan respectively, or -7.09%, -13.27%, and -24.67%, respectively. According to Zhuochuang News and Wande data, in the first half of 2024, the average prices of coniferous pulp, broadleaf pulp, chemical pulp, and dissolved slurry were -2.57%, +7.57%, -13.15%, and +4.49%, respectively, compared with the same period last year. We estimate that the decline in revenue was mainly due to the decline in sales in the company's pulp business. In the first half of 2024, the profit situation of dissolved pulp products was good. The gross margin was +4.73 pct compared to the same period last year, and a new breakthrough was achieved in the construction of the pulp forest project at the Laos base. In 2024, the planting area of the Lao base reached 10,050 hectares, and 8100 hectares were planted before the rainy season. An additional 2,000 hectares will be planted after the rainy season, and it is expected that the annual planting target can be successfully achieved.

The advantages of raw materials have been shown, the results of cost reduction and efficiency have been remarkable, and profitability has improved.

2024H1's gross margin was 17.57%, +2.77pct; the net margin was 8.60%, +2.10pct; the period expense ratio was 6.84%, -0.95pct, with sales, management, R&D, and financial expenses ratios of 0.43%, 2.39%, 2.11%, and 1.91%, respectively, +0.06, -0.11, -0.46, and -0.44pct, respectively. In the first half of 2024, the company made full use of the advantages of raw materials, and achieved remarkable results in cost reduction and efficiency. While ensuring product quality, the paper machines at the company's various bases actively use homemade wood pulp, which greatly reduced production costs; the Shandong base developed new chemical mechanical pulp and other products to help reduce production costs; and the forestry team at the Lao base added a record high in the first half of the year.

Projects under construction are progressing steadily, new projects have been launched one after another, and there is plenty of momentum to follow up.

In the first half of 2024, construction and technical improvement projects in the Nanning Park at the Guangxi base progressed steadily: the 0.3 million ton household paper project (phase 1) progressed smoothly, and 4 tissue production lines are expected to enter trial production in the third quarter of 2024; the PM11/PM12 high-grade wrapping paper production line in the Nanning Forest Pulp and Paper Integrated Technical Reform and Supporting Industrial Park (Phase I) project has been implemented and is expected to enter the trial production stage one after another in the fourth quarter of 2025; the Nanning Linpu Paper Integrated Technical Reform and Supporting Industrial Park (Phase II) project won the shareholders' meeting The review was approved and officially launched. The project will build a special paper production line with an annual output of 0.4 million tons, a bleached chemical wood pulp production line with an annual output of 0.35 million tons, a mechanical wood pulp production line with an annual output of 0.15 million tons and related supporting facilities. The total investment is expected to be no more than RMB 7 billion. Construction of the 0.037 million-ton special paper-based new material project and the second phase of the 140,000-ton special paper project in the Yandian factory area of the Shandong base also began. New projects under construction are progressing steadily, while new projects in Shandong and Guangxi have been launched one after another, laying a good foundation for the company's development over the next two to three years.

Production and sales in the paper industry have increased, profits have improved, and we are looking forward to peak season performance.

Since 2024, the country's machine-made paper and paperboard production has maintained a double-digit growth trend. From January to June 2024, the country's machine-made paper and board production was 76.613 million tons, up 11.8% year on year. Since statistics are available, paper and board production in the first half of the year exceeded 70 million tons; the revenue and profit of large-scale paper companies continued to grow, and the paper and paper products industry achieved operating income of 699.21 billion yuan from January to June 2024, with a total profit of 22.79 billion yuan, a year-on-year increase of 104.9%. In the first half of 2024, pulp prices continued to rise. According to Zhuochuang information, the prices of coniferous pulp and broadleaf pulp at the end of June 2024 were +8.78% and +9.34% respectively. Since entering the second half of the year, with new production capacity at home and abroad, pulp prices have declined to a high level, especially broadleaf pulp. As of August 29, 2024, the prices of coniferous pulp and broadleaf pulp were -1.82% and -11.31% respectively compared to the end of June. Prices of wrapping paper and cultural paper continued to be low compared to the end of June. Packaging paper is about to enter the peak traditional consumption season. Demand is expected to gradually recover, providing support for the price of wrapping paper. Cultural paper is about to enter the fall bidding season. It is expected that the price of paper will be high. After the company resumes business, it is expected that the price of pulp used in Q3 will be high, the cost pressure in Q4 will gradually fall, and profits will recover somewhat.

Maintain the company's “buy” investment rating.

The company is expected to achieve net profit of 3.416 billion yuan, 3.849 billion yuan, and 4.105 billion yuan in 2024, 2025, and 2026, respectively. The corresponding EPS is 1.22 yuan, 1.38 yuan, and 1.47 yuan, respectively, and the corresponding PE is 10.22 times, 9.07 times, and 8.50 times, respectively. The company is a leading enterprise in the paper industry. It operates steadily, continues to promote the integrated strategy of forest pulp and paper. Projects under construction are progressing steadily, new projects are being launched one after another, the scale continues to rise steadily, further consolidating its leading position in the industry, and maintaining the company's “buy” investment rating.

Risk warning: the risk of fluctuating raw material prices; the risk of demand falling short of expectations; the risk of a sharp increase in industry capacity; the risk of the company's production capacity falling short of expectations.