The 2023 results fell far short of our expectations and those of the market

The company announced 2023 results: 2023 revenue of 8.6 billion yuan, -12% year on year, net profit loss of 238 million yuan, -139% year-on-year; 4Q23 net profit to mother - 354 million yuan. The performance was significantly lower than our and market expectations, mainly due to the impact of the 4Q23 company's accrued impairment and woodland asset clean-up. Comment: 1) High inventory slurry costs are dragging down a ton of profit: The company announced that in 2023 it will achieve output of 1.0673 million tons (-1.5% YoY), sales volume of 1.069,700 tons (-1.19% YoY), and gross margin of pulp and paper is 8.8%, year-on-year, -8ppt, mainly due to low paper price+high inventory slurry cost. 2) The transfer of shares in the chemical subsidiary was completed in February of this year: revenue in the chemical sector was 220 million yuan, -3.5% year-on-year, with a gross margin of 32%; the company announced that in February 2024, the company completed the transfer of 39.51% of the holding subsidiary Shuangyang Hi-Tech's shares to the parent company China Paper. Currently, the company holds 38.72% of the shares. 3) Forestry asset clean-up is the main reason why 4Q23's performance fell short of expectations: the company announcement added an additional deduction of 45 million yuan to Chengtong Kaisheng Goodwill; in 2023, non-operating expenses were 305 million yuan, mainly due to 4Q23 forest asset clean-up losses of 305 million yuan. 4) Improved cash flow, peak asset expenditure period: operating cash flow of 1,056 million yuan, +39% over the same period, mainly due to a decrease in deposit guarantees and bill guarantees; capital expenditure rose sharply, mainly to promote the construction of 450,000 tons of cultural paper production capacity. The company suspended a fixed increase of 2.5 billion yuan in January 2024, and the company announced that it plans to use project loans+own funds to meet project expenses.

Development trends

Cultural paper profits are expected to recover steadily. Demand for cultural paper is textbook teaching aids and study orders, and demand is growing steadily; the cultural paper pattern is concentrated, leading care price systems are clear, and production capacity is concentrated in large factories, and there is a tight balance between supply and demand in the industry. Since March, cultural paper has entered the peak season. Leading companies have continuously raised the price of two rounds of paper by a total of 400 yuan/ton. According to our research, the current implementation situation is good. In addition, 1H24 leaders are still consuming early low-price inventory, and the company's self-supply rate of pulp is ~ 50%. We expect a steady recovery in the profit of 2-3 Q cultural paper, and the problems dragged down by high-price pulp are expected to gradually ease in the early stages. The company expects to start producing 450,000 tons of cultural paper by the end of 2024, and the company's current theoretical production capacity is 1 million tons. If implemented as scheduled, it is expected to contribute a significant increase in 2025.

The CCER market restarted as scheduled, and Yueshi signed a contract to reserve abundant woodland. In January 2024, CCER officially restarted, with a volume of 375,000 tons on the first day, with an average transaction price of 63.5 yuan/ton. According to the CICC ESG team, “Looking ahead, we think CCER supply may slowly be released, and demand may increase as the national carbon market expands.” According to the company's annual report, Yueji has signed a development contract area of 4.42 million mu in 2023, and has signed a total of 36.47 million mu of woodland and 3.06 million mu of farmland carbon sink development contracts, leading its peers in the contracted reserve area. We believe that the carbon sink market is still in the early stages of exploration, and the business's contribution to profit is relatively limited in the short term.

Profit forecasting and valuation

Considering the decline in the tonne net profit center and the fulfillment of carbon exchange profits or falling short of expectations, we lowered the 2024 net profit of 49% to 410 million yuan, and introduced net profit of 500 million yuan in 2025, corresponding to 2024-25e P/E 22x and 18x; considering the 2024 cardboard sector profit improvement and sector valuation risk appetite correction, we lowered the target price by 30% to 5.6 yuan. The company is a leading middle and high-end cultural paper and carbon sink reserve pioneer. We maintain an outperforming industry rating. The target price corresponds to 2024-25e P/E 24x, 20x, implied 12% upside.

risks

Weak demand; large cost fluctuations; impairment effects; woodland operating risks; capacity investment falls short of expectations.