Incident: The company released its mid-year report. In the first half of '24, it achieved revenue of 3.431 billion yuan, an increase of 20.76% year on year; achieved net profit of 0.232 billion yuan to mother, reversed losses year on year, and realized net profit of 0.224 billion yuan after deduction, reversing losses year on year, with basic earnings per share of 0.58 yuan.

2Q24 revenue grew steadily, and profit declined somewhat month-on-month: 2Q24 achieved operating income of 1.705 billion yuan, a year-on-year increase of 7.71%, and net profit to mother of 0.099 billion yuan (1Q24 was 0.134 billion yuan), and profit declined month-on-month. In the first half of '24, the company sold 0.5661 million tons of machine-made paper, up 32.82% year-on-year. Mainly due to rising production capacity and the introduction of new production capacity, sales of food wrapping paper, consumer materials, publishing and printing materials, and industrial supporting materials increased 5.4, 0.016, 0.054, and 0.018 million tons respectively, with revenue of 15.99, 1.176, 0.512, and 0.137 billion yuan respectively.

Gross profit margin and net margin increased, and expenses increased during the period: The company's gross profit margin was 12.10% in the first half of '24, an increase of 6.83 pct over the previous year. Among them, the gross margins of food wrapping/consumer materials/publishing and printing materials/industrial supporting materials were 5.48%/23.35%/6.62%/10.24%, respectively. In terms of the cost ratio for the period, the sales expense ratio decreased by 0.02 pct to 0.20% year on year, the management cost ratio increased by 0.11 pct to 1.38% year on year, and the R&D cost ratio increased by 0.40 pct to 1.58% year on year. Mainly due to increased R&D investment, the financial cost ratio increased 0.03 pct to 1.69% year on year. Under the combined influence, the company's net interest rate increased by 7.26pct year-on-year to 6.83%.

The production capacity of chemical machine pulp has climbed the slope, and the paper production capacity continues to expand: 0.3 million tons of machine pulp at the Jiangxi base was put into use in 1q24. Production has basically been achieved by 24, and the balance between food white cardboard and cultural pulp paper has basically been achieved.

As of mid-24, the company's total production capacity of paper and pulp has exceeded 2.39 million tons, followed by 0.25 million tons of industrial wrapping paper, 0.25 million tons of glassine paper, and 0.07 million tons of decorative base paper at the Hubei base, as well as 0.15 million tons of cultural paper and 40,000 tons of digital transfer paper production lines at the Jiangxi base, which are expected to be put on the market one after another from 3Q24 to 4Q25.

Profit forecast and rating: We expect the company's net profit for 24-25 to be 0.48 and 0.646 billion yuan, respectively, with year-on-year growth rates of 75.9% and 34.7%. The closing price on September 5 corresponds to the 24-25 PE of 9.9 and 7.4 times. Refer to the comparable company giving the company a PE valuation of 12 to 13 times in 24 years, corresponding to a reasonable value range of 14.28 to 15.47 yuan, giving a “superior to the market” rating.

Risk warning: Downstream demand is weak, the company's production capacity investment falls short of expectations, and raw material prices fluctuate greatly.