3Q24 results in line with our expectations

Xianhe Co., Ltd. (Xianhe) announced its 1-3Q24 results: Revenue rose 16.89% YoY to Rmb7.26bn and net profit attributable to shareholders grew 114% YoY to around Rmb817mn. In 3Q24, revenue rose 8.68% YoY to Rmb2.66bn, net profit attributable to shareholders grew 32.49% YoY to Rmb267mn, and recurring net profit increased by 45% YoY to Rmn243mn, in line with our expectations.

1) Production and sales volume of specialty paper increased steadily: We estimate that overall production and sales volume in 3Q24 exceeded 300,000t, with production and sales volume of specialty paper surpassing 250,000t. Given weak demand and falling spot pulp prices, we think that per-tonne prices continued to decline in 3Q24. Overall, we estimate headquarters' net profit per tonne was about Rmb900.

2) Ivory board and new production capacity in Guangxi weighed on earnings in 3Q24: We estimate the above factors combined eroded earnings by around Rmb20mn in 3Q24, due to low paper prices and the high costs in the preliminary stage of new production lines.

3) Per-tonne net profit remained high at Kingdecor: In 3Q24, Kingdecor contributed investment income of approximately Rmb48mn. Given weak market demand in 3Q24, we think sales volume declined slightly QoQ and per-tonne net profit fell moderately QoQ to more than Rmb1,000. We think prices may come under pressure in 2H24- 2025 due to the launch of multiple new manufacturing facilities.

4) Financials: In 1-3Q24, net operating cash flow was Rmb448mn; capex rose sharply YoY to Rmb3.3bn; liability-to-asset ratio was 65%, up slightly from 1H24.

Trends to watch

Earnings to recover QoQ in 4Q24. In 3Q24, the overall earnings declined moderately QoQ, as the costs of the inventory of pulp at the company was at a full-year high, demand was weak, and prices of some products slightly declined. Looking ahead, we think per-tonne profit will recover QoQ in 4Q24, as the costs of the inventory of pulp may decline. The ramp-up of manufacturing facilities in Guanxi and Hubei may push up production and sales volume in 4Q24, in our view.

Xianhe may continue to expand production capacity in 2025. The company expects its production capacity of pulp and paper to exceed 2mnt by end-2024 (vs. more than 1.6mnt at end-1H24). The company may continue to expand production capacity in 2025. Its production capacity of paper may exceed 2mnt (including 0.3mnt in production capacity for cardboard) and production capacity of pulp may reach 1mnt (including 0.1mnt in Henan, 0.6mnt in Guangxi, and 0.3mnt in Hubei).

We expect its production volume to increase by more than 15% YoY after the ramp-up of new manufacturing facilities in 2025. In the medium and long term, we think integrated forest, pulp, and paper projects will be a trend of the papermaking industry. The company is expanding its presence in the upstream of the papermaking industry chain to improve its advantage in costs. We think the company will increase its capability of mitigating the impact of volatile costs along the industry chain by expanding product categories, increasing production capacity, and improving its leading position.

Financials and valuation

We keep our 2024 net profit forecast unchanged. Given weak demand, we slightly lower our 2025 net profit forecast 11% to Rmb1.16bn. The stock is trading at 12x 2024e and 11.7x 2025e P/E. We roll over to the valuation for 2025. We maintain an OUTPERFORM rating and our target price of Rmb25. Our TP implies 16x 2024e and 15x 2025e P/E, implying 30% upside.

Risks

Disappointing demand; sharper-than-expected fluctuations in pulp prices; new supply higher than expected.