The company released three quarterly reports: 24Q1-3 achieved revenue of 5.466 billion yuan (YoY +17.2%), net profit to mother 0.327 billion yuan (YoY +205.9%), net profit of 0.316 billion yuan (YoY +239.4%); single Q3 realized revenue 2.035 billion yuan (YoY +11.6%), net profit attributable to mother 0.095 billion yuan (YoY -20.6%), net profit of 0.091 billion yuan (-3.4% year over year) According to our estimates, benefiting from the implementation of new production capacity in Hubei (corrugated paper+sandtube paper), the company's production and sales are expected to rise to 0.4 million tons+ (Q2 about 0.28 million tons). The original business price is expected to remain steady, but costs have risen and the profit per ton has declined slightly. Furthermore, the Hubei project contributed significant increases, and the overall performance was in line with expectations.

The segmented track differentiation accelerated, and the special paper continued its excellent performance. 1) Due to supply and demand pressure, Q3 production and sales of food cards are expected to decline slightly, and the average price remains stable (the average price of white cards in the 24Q3 market is -0.5% month-on-month); 2) the pattern of special paper is excellent, and production and sales are expected to remain strong; 3) the off-season price of cultural paper is under pressure (24Q3 double adhesive paper/coated paper ratio is -5.8%/-3.4%, respectively), and the capacity utilization rate is steadily increasing. Looking forward to the future, terminal demand pressure is still there. It is expected that the average price will fluctuate downward in Q4. At the same time, the cost of storing low-price slurry will improve, and the efficiency of self-produced slurry will improve, and the company's profit per ton is basically stable.

Horizontal and vertical layout, clear growth path. In 2023, the company successively launched 0.022 million tons of digital transfer paper and 0.018 million tons of drawing paper, and acquired 0.035 million tons of industrial liner production capacity; in 2024, the first phase of Hubei was launched (2 production lines put into operation, 1 production line trial production), with a total design capacity of 2.096 million tons. The company's projects currently under construction include 0.25 million tons of industrial wrapping paper, 0.25 million tons of glassine, 0.07 million tons of decorative base paper, 0.15 million tons of cultural paper, and 0.04 million tons of digital transfer paper production lines. The product matrix continues to be optimized, and the growth path is clear.

In addition, 0.3 million tons of machine pulp production capacity continues to climb (food & cultural paper has reached the balance of pulp and paper), and 0.6 million tons of chemical pulp has now been announced for the second time in the EIA. The process of integrating pulp and paper is being accelerated, which is expected to weaken the impact of the cycle.

Profits were under pressure for a short time, and cost performance was stable. The 2024Q3 gross margin was 10.7% (year-on-year stable, -0.6pct month-on-month), and the net margin to mother was 4.7% ((-1.9pct year-on-year, -1.1 pct month-on-month). The pressure was mainly due to high raw materials. In terms of cost performance, the cost rate during 2024Q3 was 4.5% (+0.3 pct year on year), of which the sales/R&D/management/ finance expenses ratio was 0.2%/1.3%/1.4%/1.6% ((-0.3/-0.2/+0.2/+0.5pct), respectively, and cost control was stable.

Cash flow is under pressure and operating capacity is stable. The net operating cash flow of 2024Q3 was 0.126 billion yuan (-0.654 billion yuan year on year), and the pressure was mainly due to a decrease in time deposit recoveries. In terms of operating capacity, as of 2024Q3, the number of days receivable, payable, and inventory turnover was 55.11/41.71/39.95 days, respectively (-7.6/+1.2/-3.0 days compared to the previous year).

Profit forecast: We expect the company's net profit to be 0.41, 0.55, and 0.74 billion yuan respectively in 2024-2026, corresponding to PE of 13.2X, 9.8X, and 7.3X, maintaining a “buy” rating.

Risk warning: Raw materials fluctuate, demand recovery falls short of expectations, food card competition intensifies, and production capacity falls short of expectations.