3Q24 results were slightly lower than our and market expectations

The company predicts 3Q24 results: 1-3Q24 achieved revenue of 2.85 billion yuan, -4.45% year on year, net profit of 0.409 billion yuan, +2.94% year on year; of these, single 3Q achieved revenue of 0.905 billion yuan, -19.4% year on year, and 0.106 billion yuan of net profit, -34% year over year, and -32% month on month, lower than our and market expectations. The main reason was the increase in inventory costs, mainly due to weak demand and reduced production and sales volume. Comment: ① Production and sales are lower than expected: We estimate that 3Q24's sales volume was around 0.075 million tons (vs 2Q24, 3Q was above 0.08 million tons in the same period last year). The main reason for the month-on-month decline was weak domestic and foreign demand and the impact of summer maintenance shutdowns. Furthermore, production capacity of 0.08 million tons, which was originally scheduled to be put into operation in 3Q24, was delayed, which is also one reason why this performance fell short of expectations. ② The price system is relatively stable: Huawang's high-end decorative paper circuit has a good long-term competitive ecology, a good supply and demand pattern, and prices are relatively resistant to falling; however, considering the current weak market, the company adjusted its product structure in due course, and prices may drop for some products at the same time. ③ Net profit per ton declined month-on-month: We estimate that 3Q24 company's overall net profit per ton fell slightly month-on-month. The core is an increase in inventory slurry costs+a possible reduction in some prices. ④ Beautiful dividend: The company previously announced a mid-term dividend of 64.49% for 2024. Assuming that the annual dividend refers to this interim dividend ratio, it corresponds to the current dividend rate of 5.9% of the company's current price dividend. ⑤ Excellent financial quality: 1-3Q24 operating cash flow 0.364 billion yuan, capital expenditure 0.16 billion yuan, balance ratio 36%.

Development trends

Optimistic about 4Q24 volume and month-on-month recovery. We believe that in the past few years, the price system of the company's high-end decorative base paper has been stable, and the supply and demand pattern is relatively good, but at the same time, domestic and foreign demand is facing challenges. At the same time, the price of paper may be under slight pressure; however, considering the decline in 4Q stock pulp costs, adding up the company's 0.08 million tons of additional production capacity (we expect to contribute an increase of about 0.015 million tons throughout the year), we believe that 4Q24 is expected to recover sales volume and net profit per ton.

There is still room for overseas nuggets to grow. According to our statistics, since 2017, Xia Wang+ Huawang alone has added more than 0.4 million tons of production capacity (vs. industry demand within 0.1 million tons). The logic behind maintaining production capacity expansion and maintaining high capacity utilization rates is — increasing the market share of the middle and high-end market and expanding overseas. In the medium term, we are optimistic that the leaders will expand overseas markets, compounding the rising domestic middle and high-end penetration rate. We are optimistic that Huawang+Xia Wang's new production capacity will be digested. Earlier, the European Commission launched an anti-dumping investigation against Chinese decorative paper at the request of four European manufacturers of decorative base paper. Huawang adopted the same price strategy as European products, and the price of some products may be higher, which theoretically does not constitute vicious price competition. Furthermore, the company announced that 2023 will only account for a small single digit of sales in the EU. We expect the short-term impact to be limited, and we need to observe subsequent feedback from the EU.

Profit forecasting and valuation

Considering the company's delayed production capacity and weak demand, we lowered 2024-25 net profit by 14%, 16% to 0.55 billion yuan, and 0.59 billion yuan, and the current price corresponding to 2024-25e P/E is 11.5x and 10.6x. We maintained the outperforming industry rating. Considering that the valuation rotates until 2025, the target price was lowered by 12% to 15 yuan, and the target price corresponding to 2024-25e P/E was 13x and 12x, implying 11% upward space.

risks

Demand falls short of expectations; costs fluctuate beyond expectations; anti-dumping exceeds expectations.