Events:

The company announced its 12-year annual report and 13-year quarterly report: operating income for the whole of 2012 was 1.45 billion, an increase of 9.27% over the same period last year; the net profit belonging to the owner of the parent company was 90.36 million yuan, an increase of 2.42% over the same period last year, and basic earnings per share was 0.39 yuan. The allocation plan is 1.18 yuan for 10 dispatches.

1Q2013 realized operating income of 275 million yuan for the whole year, down 3.67% from the same period last year; the net profit belonging to the owner of the parent company was 17.13 million yuan, down 26.44% from the same period last year, and basic earnings per share was 0.07 yuan.

Comments:

The performance is slightly lower than expected: 1) both volume and price rise to promote growth. The company completed sales of 114000 tons in 12 years, an increase of 6.9% over the same period last year. It is estimated that the average price of the company's products rose 2.2% compared with the same period last year, mainly driven by the increase in the proportion of transparent paper. 2) the expense rate exceeded expectations, resulting in lower-than-expected performance. In 12 years, the company's three-item expense rate reached 17.5%, an increase of 2.1 percentage points over the same period last year. The absolute value was 254 million, an increase of 50 million, an increase of 24% over the same period last year. Among them, the sales expense rate increased by 0.4%, the management expense rate increased by 0.8%, and the financial expense rate increased by 0.9%. The increase in sales and administrative expenses is mainly due to the increase in R & D and marketing costs caused by the development and sale of new products. The increase in financial expenses is mainly due to the full expense of the loan interest of the paper machine project with an annual output of 15000 tons. In 2012, the company's interest expenditure was 66.079 million yuan, of which 17.586 million yuan was capitalized and 48.49 million yuan was spent.

High-permeability paper continues to grow high, increasing market share: 1) high-permeability filter stick paper continues to grow. The annual revenue of mouth stick paper reached 557 million, an increase of 59% over the same period last year, which is significantly higher than the growth of other cigarette paper and tobacco industry, and is the main source of revenue contribution. It accounted for 38.48% of revenue, up 14.18 percentage points from the same period last year. 2) policies benefiting from high growth. The State Tobacco Administration requires that the tar content of cigarettes should be reduced to less than 10mg in 2015, and the main means to reduce the tar of cigarettes is to use high permeability filters, and high permeability paper is the core material for the production of high permeability filters. In 2012, national cigarette sales were 49.5 million cases, an increase of 2.4% over the same period last year, of which sales of low-tar cigarettes were close to 6.5 million cases, an increase of 97% over the same period last year. From 2013.1 to February, sales of low-tar cigarettes were close to 1.5 million cases, an increase of 32.9% over the same period last year. 3) High growth, increase the company's market share, and strengthen the leading position. In 2012, the company's share of the domestic tobacco paper comprehensive market reached an all-time high of 32.11%, an increase of 0.86% over the same period last year. The company is the leading manufacturer of domestic cigarette paper, the market share continues to increase, and the leading position is further strengthened. Compared with Moody's market share of more than 50% in North America, the company also has a market share of more than 18%, assuming the size of the market remains the same, the company still has 56% room for revenue growth.

The three expense rates have a limited impact on 13-year performance. 1), 1Q2013, the rate of expenses for three items is 18.9%, an increase of 1.5% over the same period last year, and an increase of 1.4% over the previous year. The increase in expense rate mainly came from financial expenses, which increased by 1.4 percentage points compared with the same period last year. The main reasons for the increase in financial expenses are: the production of fund-raising projects and the expense of interest on special funds. In 2012, "6000 tons of high permeability filter rod molding paper project" and "17000 tons of Bible paper project" have been completed for the fund-raising projects, and the interest cost of a total of 227 million funds has begun to be expended. 2) the increase in revenue will lead to a decrease in the rate of sales expenses and management expenses. The rates of these two expenses are the same as the same period last year and month-on-month, and there will be room for them to decline as income picks up. Overall, the impact of expense rates on 13-year performance is limited.

Downgrade the profit forecast and maintain the "buy" rating: according to the company's annual report and quarterly report, we lowered our previous performance forecast. After re-calculation, the EPS of the forecast company from 2013 to 2014 is 0.46 yuan and 0.56 yuan respectively, corresponding to 13x and 11x respectively. We are still optimistic about the company's growth potential, unique leading position and excellent management ability, so we keep our "buy" rating unchanged.

Risk tips: 1, tobacco enterprises bidding makes the price of traditional cigarette paper show a downward trend; 2, fund-raising projects do not meet expectations