1Q24 results are in line with our and market expectations
The company announced 1Q24 results: operating income of 1.73 billion yuan, +37% year over year; net profit to mother of 134 million yuan, turning a year-on-year loss into a profit, in line with our expectations and the market. Comment: 1) Food card prices have dropped significantly, and special paper is still in the repair channel: we estimate that 1Q24's sales volume is 28-290,000 tons, with slight loss during the Spring Festival; in terms of tonnage prices, the price of food cards dropped significantly (refer to RISI data, 1Q24 white card price -4%/-7%), specialty paper prices are still recovering. In March, the company issued a price increase letter of 500 yuan/ton for glassine and 1,000 yuan/ton for heat transfer paper. 2) The cost of tons has risen slightly: The cost of tons of slurry actually used by the company has risen slightly month-on-month, suppressing the company's net profit of 450-500 yuan for 1Q24 tons; along with the company's production of 300,000 tons of pulp in Jiangxi, the cost advantage has gradually accumulated, which is expected to hedge against the upward pressure on some costs. 3) Improved cash flow and high capital expenditure: The company's net cash flow from operating activities was 173 million yuan, a year-on-year increase of 810 million yuan, mainly due to the company advancing the construction of new projects in Hubei. Earlier, the company announced that the Hubei base plans to invest 10 billion yuan. We judge that cash flow and liabilities will still be under pressure for the next two years; the company's balance ratio is 69%.
Development trends
The cost of the ton increased slightly, and the 2Q24 ton profit was running steadily. As demand in Europe recovers slightly and supply-side disturbances continue to ferment, pulp prices rose more than expected after the Spring Festival. In this context, various types of paper began to rise generally. For example, the company recently released the second round of price increases of 1,000 yuan/ton after a year. We expect part of this round of price increases to be implemented; but at the same time, we expect the company's 2Q single-ton chemical paste cost to run steadily on an upward channel. We expect the company's net profit per ton to run steadily in the second quarter. At the end of last year, the company gradually increased its contribution. Jiangxi 500,000 tons of food cards and 300,000 tons of cultural paper benefited from self-sufficiency in raw materials, and the cost advantage of core categories is expected to be further consolidated; in the context of scarce supply of high-quality pulp in the medium to long term, the strategic importance of self-sufficiency in pulp is highlighted.
The large-scale expansion of the Hubei base will be accelerated in 2024. In 2023, the company added 22,000 tons of transferred printing paper, 300,000 tons of machine pulp, 18,000 tons of industrial lining paper, and added 35,000 tons of industrial liner through acquisitions. By the end of 2023, the company had a raw paper production capacity of 1.416 million tons and a pulp production capacity of 300,000 tons; the company expects 1H24 to test production of 600,000 tons of boxboard corrugated paper construction in Hubei, and we expect to achieve more than 2 million tons of base paper production capacity by the end of 2024. After the Hubei base is landed, the company is expected to achieve collaboration between the three bases in the medium term to drive capacity and profit Take it to a new level.
Profit forecasting and valuation
We keep our profit forecast for 2024-2025 unchanged. The current price corresponds to the 2024-25 P/E of 11x and 10x; we maintain the outperforming industry rating and target price of 20 yuan, and the target price corresponding to the 2024-25 P/E is 14x and 13x, implying 27% upward space.
risks
Demand fell short of expectations; pulp fluctuated beyond expectations; new production capacity dragged down performance; cash flow deteriorated.