Performance summary: The company released its 2023 three-quarter report. In the first three quarters of 2023, the company achieved revenue of 6.82 billion yuan, +11.6% year-on-year; realized net profit of 170 million yuan, or -39.7%; and realized net profit of 140 million yuan, or -43.2% year-on-year. Looking at a single quarter, 2023Q3 achieved revenue of 2.14 billion yuan, +22.4% year-on-year; realized net profit of 0.8 billion yuan, +72.7% of the previous year; and realized net profit of 0.7 billion yuan after deducting non-return to mother, +128.3% year-on-year. Q3 revenue growth accelerated, and performance was impressive.

The pressure on the cost side is gradually easing, and performance is expected to continue to recover. During the reporting period, the company's overall gross margin was 30.2%, y-2.3 pp, and the single Q3 gross margin was 34%, +2.6 pp. The decline in pulp prices in the third quarter gradually spread to the reporting side, easing cost pressure. The gross margin for Q3 alone rebounded markedly over the same period last month. In terms of cost ratio, the company's total expense ratio was +27.4%, +0.1pp year on year. The expense ratio was generally stable. The sales expense rate/management expense rate/financial expense rate/R&D expense ratio were 20.3%/4.7%/-0.3%/2.7%, respectively, and +0.2 pp/0 pp/-0.3 pp/+0.3 pp. Overall, the company's net interest rate was 2.4%, -2.1pp year on year. The net interest rate for Q3 alone was 3.8%, +1.1 pp year over year. In the short term, as the average inventory cost of the company's pulp falls, profitability is expected to improve marginally; in the medium to long term, the company's high-end strategy continues to advance, and the profit center is expected to gradually rise.

Pulp prices are falling, demand is improving, and household paper companies' profits have improved marginally. According to data from Longzhong News, the mainstream prices of broad-leaved pulp/coniferous pulp at the end of October were about 5,500 yuan/ton and 6150 yuan/ton, a marked decline from 6,400 yuan/ton and 7,350 yuan/ton in early 2023. The company reserves stocks when the price of wood pulp is low, and expects the average cost of raw materials to be low for some time to come. In terms of paper prices, from May to August 2023, the mainstream price of household paper was consolidated. Downstream demand season has entered the peak demand season since the beginning of September. The price of household paper has gradually rebounded from 6,500 yuan/ton to the end of October to about 7,200 yuan/ton. It is expected that under the impetus of the peak season, paper prices will maintain a steady upward trend, and the profit of household paper companies is expected to improve marginally.

Continuously optimize the product structure to drive an increase in the sales share of high-end high-margin products. In order to meet the high-end and differentiated consumer needs of household paper, the company accurately focuses on the terminal promotion of high-end high-margin products such as oil paintings, koi, Face, Textures, and health products, and continuously promotes product structure optimization. 2023H1's household paper revenue was 4.62 billion yuan, +7.3% year on year; personal care and other products revenue was 61.19 million yuan, +7.2% year on year.

Looking ahead, as the competitive pressure on market brands eases, consumer demand is expected to continue the high-end trend, and the company's share of high-margin products is expected to continue to rise.

Profit forecasts and investment advice. The 2023-2025 EPS is expected to be 0.22 yuan, 0.45 yuan, and 0.52 yuan respectively, and the corresponding PE will be 49 times, 24 times, and 21 times, respectively, maintaining the “buy” rating.

Risk warning: risk of large fluctuations in raw material prices; risk of large fluctuations in paper prices; risk of new production capacity falling short of expectations; risk of exchange rate fluctuations.