The industry has been in business for more than 30 years, and leaders in wrapping paper are looking forward to growing and growing. The company entered the Chinese packaging board industry in 1998. After nearly 30 years of rapid growth, the company has now become the largest producer of wrapping paper in Asia. By mid-2024, the company has built 21.67 million tons of paper production capacity and over 5 million tons of pulp production capacity. In fiscal year 2024, the company's revenue reached 59.496 billion yuan. Benefiting from the continuous expansion of production capacity at home and abroad, the company's compound revenue growth rate over the past ten years reached 7%. In fiscal year 2024, the company achieved net profit of 0.751 billion yuan to mother, and profit was positive year over year.

The pace of expansion of corrugated board production is slowing down, and improvements in supply and demand are expected to lead to a recovery in prosperity. Beginning in 2022, the boxboard corrugated paper industry entered a downward cycle, and the prices of raw materials were declining. Analysis from the perspective of supply and demand: ① On the supply side, the industry entered a phase of intensive production capacity investment in 2022, and the annual domestic production capacity growth rate reached 5%-10%; at the same time, import tariffs on box board corrugated paper were lowered to 0%, and domestic enterprises imported large amounts of box board paper production capacity in Southeast Asia into the Chinese market, leading to a further increase in actual domestic supply. ② On the demand side, demand for corrugated board is inseparable from terminal consumption. Demand for terminals was weak in 2022. Although demand recovered in 2023, it was impossible to offset the increase in supply in the early stages, leading to a deterioration in supply and demand and a drop in paper prices. Looking ahead, we believe that the growth rate of new supply in the industry will decline markedly in the next three years. On the one hand, the pace of production expansion will slow down, and on the other hand, the increase in import volume is already limited. The steady increase in demand will gradually absorb excess production capacity in the early stages, and the improvement in the relationship between supply and demand is expected to gradually restore the overall boom in the industry.

The scale advantage of raw paper production capacity is outstanding, and the layout of upstream raw materials is becoming more and more complete. The company currently has 10 domestic production bases and 3 overseas production bases. The production capacity layout has basically covered all major domestic markets. Most of the bases are equipped with their own power plants, and important bases in some core markets are equipped with terminals, effectively reducing energy and transportation costs, and demonstrating its scale advantages. At the same time, after the abolition ban was officially implemented, the company actively laid out pulp production capacity, optimized product structure, and continued to enhance its ability to obtain wood chip resources (such as locating pulp production capacity near Guangxi Province, which is rich in forest resources, and equipped with its own wood chip ships) to deepen the cost advantages of homemade pulp.

We expect the company's FY2025-2027 net profit to be 0.99/1.656/2.03 billion yuan, BPS 9.84/10.19/10.62 yuan, and corresponding ROE levels of 2.1%/3.5%/4.1%, respectively. Combined with the PB valuation range corresponding to historical ROE, and considering that industry sentiment is at a historically low level, the target valuation for FY2025 is 0.4 times PB (30% off), corresponding to the target price of HK$4.26, and a “buy” rating.

Risk warning

The risk that macroeconomic growth will slow down and that the recovery in terminal demand will fall short of expectations; the risk that the company's new pulp and paper projects will not advance as expected; the risk of increased competition in the industry.