Incident: The company released its report for the first quarter of 2023: revenue reached 1,625 billion yuan (-5.4% YoY), net profit of Fumo reached 0.08 billion yuan (-79.2% YoY), and net profit of non-return mother reached 0.07 billion yuan (-79.3% YoY).

Short-term turbulence affects sales, with high pulp costs and pressure on profits. Due to the early Spring Festival, some shipments were reflected in 22Q4; in addition, downstream cigarette label printing was revised, and deferred demand is expected to be released in Q2. According to our estimates, it is estimated that the company will sell about 170,000 tons of paper in Q1; on the price side, the average price will remain stable month-on-month due to the excellent layout and middle of the card slots. High-priced wood pulp gradually reached warehouses, Q1 costs climbed, and capacity utilization declined, putting pressure on overall profit performance. Looking ahead, downstream demand will recover moderately, and paper production and sales are expected to rise; it is expected that prices of various types of paper will slowly fall in Q2 and will gradually bottom out in Q3, but at present, the actual market price of deciduous pulp has fallen to 550-600 US dollars/ton (high of 850 US dollars/ton), and the cost drop is significantly higher than paper prices. It is expected that profits in the paper sector will gradually recover from Q2.

The layout of the entire industry chain has been accelerated, and the growth path is clear. Currently, the company has a production capacity of 600,000 tons of white card and 270,000 tons of special paper. Looking ahead to 2024, 300,000 tons of food cards and 60,000 tons of heat transfer printing are expected to contribute to the increase. Moreover, in the future, the company is expected to include 612,000 tons of additional machine pulp production capacity, weakening the impact of the cycle, and the growth path is clear. In addition, the company is still launching cross-border products such as medical film coatings, digital hot film, and carbon fiber paper. Currently, the company is actively cooperating with industry leaders and research institutes (9 industry-university-research cooperation agreements have been signed), effectively covering strategic emerging industries such as ecological and environmental protection and new energy, and is expected to continue to contribute to increased revenue and profits in the future.

Profitability is solid, and cost control is excellent. The company's gross margin for 2023Q1 was 10.00% (-4.54pct year on year), and the net interest rate to the mother was 0.49% (-1.73pct year on year). Judging from the cost performance, the cost rate for the Q1 period was 9.39% (-0.17pct year on year), of which the sales expense ratio was 1.15% (year-on-year -0.05pct), the management expenses rate was 3.36% (year-on-year -0.27pct), the R&D expenses rate was 5.13% (+0.83pct), and the financial expense ratio was -0.25% (-0.68pct year on year), and cost control was excellent.

Increased procurement of raw materials has put pressure on cash flow. The net operating cash flow of 2023Q1 was -584 million yuan (year-on-year - 902 million yuan), mainly due to the downward cycle of the raw materials department, and the company increased its procurement volume. In terms of operating capacity, the number of accounts receivable turnover days was 51.06 days (+9.88 days compared to the previous year), the number of accounts payable turnover days was 44.42 days (+6.51 days compared to the previous year), and the number of inventory turnover days was 78.79 days (+24.31 days compared to the previous year).

Profit forecast: The company's net profit for 2023-2025 is estimated to be 4.6 billion yuan, 550 million yuan, and 63 billion yuan respectively. The corresponding PE is 17.3X, 14.4X, and 12.5X, maintaining the “buy” rating.

Risk warning: Fluctuations in raw materials have exceeded expectations, production capacity has fallen short of expectations, and competition for food cardboard has intensified.