Incident: The company released its mid-year report. In the first half of '24, it achieved revenue of 4.604 billion yuan, an increase of 22.23% year on year; realized net profit of 0.55 billion yuan, up 204.73% year on year, achieved net profit of 0.499 billion yuan after deduction, an increase of 237.55% year on year, and basic earnings per share of 0.78 yuan.

Sales growth drove revenue growth, and 2Q24 revenue and profit continued to increase month-on-month: 2Q24 achieved operating income of 2.395 billion yuan, a year-on-year increase of 24.14%, an increase of 8.40% month-on-month, and achieved net profit of 0.282 billion yuan to mother, an increase of 381.29% year-on-year, 4.74% month-on-month, and 2Q24 revenue and profit continued to increase month-on-month.

In the first half of '24, sales of specialty pulp and paper were 0.5136 million tons, up 31.77% year on year. By business, the revenue of household consumer series, food and medical packaging paper, business communication and security paper, tobacco industry paper, electrical and industrial paper was 22.98, 8.41, 0.343, 0.391, and 0.396 billion yuan, respectively. Among them, sales of food and medical consumer products were 0.1086 million tons, up 50.19% year on year, and production of label release series materials increased 20.41% year on year. Revenue from transfer series materials increased 16.98% year on year, and revenue from paper based materials for electrolytic capacitors increased 31.59% year on year.

Gross profit margin and net margin increased, and interest expenses increased: The company's gross profit margin was 17.69% in the first half of '24, up 8.58pct year on year. The gross margin of daily/food/medical/business/tobacco/electrical and industrial paper series was 18.76%/18.53%/24.42%/18.87%, respectively. In terms of the cost ratio for the period, the sales expense ratio decreased by 0.09 pct to 0.24% year on year, the management expense ratio decreased by 0.14 pct to 1.59% year on year, the R&D expense ratio increased 0.06 pct to 1.33% year over year, and interest expenses increased 56.83% year on year to 0.101 billion yuan. In addition, investment income in joint ventures increased by 12.62% to 0.099 billion yuan year on year. Under the combined influence, the net interest rate increased year-on-year 7.21pct to 12.04%.

The profit situation of food cards improved, and pulp production capacity was gradually put into operation: in the first half of '24, the company made technical changes to the performance and quality of 0.3 million tons of food card paper, and the market was more stable. The sales volume reached 0.0513 million tons. The profit situation improved compared to the beginning of production. The subsidiary Hefeng New Materials lost 27.47 million yuan in the first half of the year, and 1H23/2H23 lost 33.45/30.17 million yuan respectively. Currently, the loss range continues to narrow, unless food cards are coated The company also plans to use part of its production capacity to produce coated cardboard. It is expected that the profitability of coated cards will exceed that of uncoated food cards in the second half of the year. Furthermore, the two chemical slurry production lines at the Hubei base and the first chemical slurry production line at the Guangxi base have been commissioned, and commissioning of the chemical slurry production line has begun. It is expected that the cost advantage will gradually become apparent in the fourth quarter, and the company's pulp production capacity will reach about 0.7 million tons by the end of the year.

Profit forecast and rating: We expect the company's net profit for 24-25 to be 1.066 and 1.365 billion yuan, respectively, with year-on-year growth rates of 60.6% and 28.1%. The closing price on September 10 corresponds to the 24-25 PE 10.1 and 7.9 times. Refer to the comparable company giving the company a PE valuation of 16 to 18 times in 24 years, corresponding to a reasonable value range of 24.16 to 27.18 yuan, giving a “superior to the market” rating.

Risk warning: The cost of raw materials fluctuates greatly, downstream demand is weak, and the release of production capacity falls short of expectations.