Performance review

3Q24 results are in line with our expectations

The company announced results: 1-3Q24 achieved revenue of 5.47 billion yuan and net profit of 0.327 billion yuan; single 3Q24 achieved revenue of 2.03 billion yuan, +11.6% year over year, and net profit to mother of 0.095 billion yuan, -20.55% year over year. The performance was basically in line with our expectations and the market.

Comment: 1) 3Q sales increased sharply month-on-month: 3Q started production of 0.6 million tons of boxboard corrugated paper, and we estimate that 3Q24 will add more than 0.1 million tons; there is no new production capacity yet. We estimate that 3Q24 will have little month-on-month increase. Overall, the estimated 3Q24 sales volume is ~0.4 million tons, an increase of more than 0.1 million tons over the previous month. The increase is mainly for corrugated box board at the Hubei base. 2) Net profit per ton continued to decline month-on-month: The company's actual cost of using tons of pulp increased month-on-month, and some paper prices, such as cultural paper, declined significantly, suppressing the company's profit performance in tons. We estimate that the company's net profit for 3Q24 tons was around 230 yuan/ton (about 350 yuan/ton for 2Q24); the cost during the 0.3 million ton slurry climbing phase at the Jiangxi base is high, and the cost advantage has not yet been released. 3) Capital expenditure is still high: 1-3Q24's net cash flow from operating activities was 0.346 billion yuan, and capital expenditure was 1.92 billion yuan, a year-on-year increase. It was mainly due to the company advancing the construction of new projects in Hubei. Earlier, the company announced that the Hubei base plans to invest 10 billion yuan. We judge that the cash flow and liabilities for the next two years are still under pressure; the company's balance ratio is 72%.

Development trends

4Q24 earnings are likely to recover month-on-month, and production is still at its peak in 2025. We believe that the current fundamentals of paper production supply and demand have not changed much, but inventory slurry costs have been reduced month-on-month, and we estimate that 4Q24 results are expected to recover month-on-month. In recent years, the company has accelerated the construction of new bases and category expansion: at the end of 2023, the company had a raw paper production capacity of 1.416 million tons and a pulp production capacity of 0.3 million tons; 1-3Q24 started production of industrial wrapping paper (0.6 million tons) and yarn tube paper (0.07 million tons) at its Hubei base. We expect that by the end of the year, the company's base paper production capacity is expected to exceed 2 million tons (+40% year over year); at the same time, the company's guidance is that there are still four production lines to be launched in 2025, including cultural paper, corrugated paper, As for decorative base paper and glassine paper, we expect the company's production capacity to reach about 3 million tons by the end of 2025.

Profit forecasting and valuation

We keep our profit forecast for 2024-2025 unchanged. The current price corresponds to the 2024-25 P/E of 11x and 9x; we maintain our outperforming industry rating and target price of 15 yuan. The target price corresponds to the 2024-25 P/E of 12x and 10x, implying a 9% upward margin.

risks

Demand fell short of expectations; pulp fluctuated beyond expectations; new production capacity dragged down performance; cash flow deteriorated.