Event: The company released its report for the third quarter of 2024. During the reporting period, the company achieved revenue of 5.466 billion yuan, +17.18% YoY; net profit to mother 0.327 billion yuan, +205.87% YoY; deducted non-net profit of 0.316 billion yuan, +239.35% YoY; and basic earnings per share of 0.81 yuan. Among them, the company achieved revenue of 2.035 billion yuan in a single quarter, +11.6% year over year; net profit to mother 0.095 billion yuan, -20.55% year over year; and deducted non-net profit of 0.091 billion yuan, or -3.38% year over year.

Profitability improved overall, and Q3 was briefly under pressure.

The rise in pulp prices from January to May '24 caused 24Q3 gross margin to be put under pressure for a short time, but the cumulative gross margin for the first three quarters still benefited from the year-on-year decline in pulp prices. During the reporting period, the company's comprehensive gross margin was 11.57%, +4.17pct year-on-year. Among them, the gross margin for the 24Q3 single quarter was 10.68%, -0.03pct year-on-year, and -0.56pct month-on-month.

During the reporting period, the company's expenses rate for the period was 4.72%, +0.42pct year-on-year. Among them, sales/management/R&D/finance expenses rates were 0.2%/1.38%/1.48%/1.67%, respectively, with year-on-year changes of -0.13 pct/ +0.16 pct/ +0.17 pct/ +0.22 pct

In the first three quarters of 2024, the company deducted non-net interest rate of 5.78%, +3.78pct year-on-year. Among them, the company's deducted non-net interest rate for the 24Q3 single quarter was 4.49%, -0.7 pct year on year, and -0.95 pct month-on-month.

Production capacity investment has increased, and the decline in pulp prices is optimistic about future profit performance. The planned production capacity of the company's Hubei and Jiangxi bases is continuing to be implemented. Production capacity is expected to reach 2.864 million tons by the end of 2025, which will double that of mid-2024. The overall cost of pulp has improved. After rising in early '24, the price of softwood pulp and broadleaf pulp began to be adjusted in mid-late May, and the price of chemical machine pulp has been declining since the end of 2023. As of October 25, 2024, the prices of coniferous pulp, broadleaf pulp and chemical machine pulp in China decreased by 0.77%, 16.55%, and 23.32%, respectively. We expect that the decline in raw material prices since May will gradually be reflected on the 24Q4 reporting side, and 24Q4 profitability is expected to improve.

Investment advice: The company is a leader in the specialty paper industry. The company has diversified horizontal product development, integrated vertical layout of pulp and paper, and production capacity construction to help scale up rapidly. It is expected that the company will achieve basic earnings of 1.04/1.42/1.81 yuan per share in 2024/25/26, corresponding to PE of 13X/10X/8X, maintaining a “recommended” rating.

Risk warning: the risk of a sharp rise in raw material prices, the risk of production capacity falling short of expectations, the risk of falling product prices, and the risk of increased market competition.