Incident: Yueyang Lin Zhi issued an announcement announcing that it plans to acquire 100% of the shares of Juntai Technology held by the controlling shareholder Teglin Paper in cash. The funding source is the company's own funds.

Acquiring shares in Juntai Technology to improve the industrial chain layout and strengthen its influence on midstream and upstream resources Juntai Technology is one of the leading manufacturers of pulp, dissolved pulp and lignin in China. Currently, the company's pulp product design capacity is 0.4 million tons/year, which can produce bleached and natural colored softwood pulp, bleached and natural broad-leaved pulp; dissolved pulp products have a design capacity of 0.3 million tons/year, and can produce both coniferous and broad-leaf dissolved slurries. In 2023, “Tiger Junsong” pulp became a deliverable brand on the Shanghai Futures Exchange. It is the first domestic pulp registered brand and the only domestic brand among the 14 deliverable brands of pulp futures.

With the development of the industry, leading domestic cultural paper companies currently generally have a high degree of pulp and paper compatibility, and there are still certain shortcomings in the chemical pulp of cultural paper at the company's Yueyang base. As one of the leading manufacturers of pulp, dissolved pulp and lignin in China, Juntai Technology will further improve the industrial chain of listed companies, deepen and continue the company's “forest pulp and paper” integration strategy, and further enhance its core competitiveness.

Profit was pressured by asset accruals, and expenses and gross margin remained stable. In terms of revenue, 24Q3 achieved operating income of 1.581 billion yuan, a year-on-year decrease of 17.81%; net profit to mother -0.046 billion yuan, a year-on-year decrease of 452.11%; and net profit after deduction of -0.002 billion yuan, a year-on-year decrease of 122.34%. We analyzed that the sharp decline in the company's net profit in 24Q3 was mainly affected by the subsidiary Hunan Maoyuan Forestry Co., Ltd.'s calculation of asset impairment preparations for forest assets based on the evaluation results of the evaluation agency.

In terms of profitability, 24Q1-3's gross margin was 6.90%, down 1.90pct year on year; 24Q3 company's gross margin was 4.95%, down 0.07pct year on year. The net interest rate of the 24Q1-3 company was -1.83%, down 3.63pct; the 24Q3 company's net margin was -2.94%, down 3.69pct year on year.

In terms of period expenses, the 24Q1-3 company's expenses rate for the period was 8.09%, down 0.86pct year on year, and the sales/management/R&D/finance expense ratios were 1.59%/2.53%/2.72%/1.24%, respectively, +0.32/-0.67/+0.04/-0.56pct, respectively. The 24Q3 company's expense ratio was 6.27%, down 1.09pct year on year, and the sales/management/R&D/finance expenses ratio was 1.42%/2.27%/2.33%/0.25%, respectively, -0.05/-0.45/+1.13/ -1.72pct, respectively.

Investment advice: We expect Yueyang Forest Paper's 2024-2026 revenue to be 8.379, 9.557, 10.356 billion yuan, up -3.03%, 14.05%, and 8.37% year-on-year; net profit to mother will be -0.088, 0.182, and 0.109 billion yuan, up 63.21% year over year, from loss to profit, -39.93%. Corresponding PE is -105.9x, 51.0x, 84.8x, giving 65xPE in '25, with a target price of 6.58 yuan. It has an investment rating of -A.

Risk warning: risk of large fluctuations in raw material prices; risk of new product promotion falling short of expectations; risk of business development falling short of expectations; risk of major shareholders reducing their holdings.