Incident: Huawang Technology released its 2023 Annual Report and 2024 Quarterly Report. In '23, the company achieved operating income of 3,976 billion yuan, up 15.70% year on year; net profit to mother was 566 million yuan, up 21.13% year on year; net profit after deducting net income of 528 million yuan, up 16.43% year on year. Among them, 23Q4 achieved operating income of 992 million yuan, an increase of 4.74% year on year; net profit to mother of 169 million yuan, up 23.82% year on year; net profit after deduction of 149 million yuan to mother, an increase of 8.80% year on year. 24Q1 achieved operating income of 952 million yuan, up 4.15% year on year; net profit to mother was 147 million yuan, up 36.59% year on year; net profit after deducted from mother was 145 million yuan, up 49.95% year on year.
In addition, in 2023, the company plans to distribute a cash dividend of 11.00 yuan (tax included) to all shareholders for every 10 shares, while transferring 4 shares to all shareholders for every 10 shares in the capital reserve fund. In total, it is proposed to distribute a discovery dividend of 360 million yuan (tax included), with a dividend ratio of 63.94%, an increase of 15.09pct over the previous year.
New production capacity released, revenue increased steadily, and export sales increased rapidly
By region, domestic and foreign revenue was 31.61/780 billion yuan respectively, up 8.28%/66.9% year-on-year respectively. With product quality and price advantages, the company successfully expanded customers in overseas markets such as Europe and Asia, quickly opened up overseas middle and high-end markets, and the growth rate of export sales revenue continued to be beautiful in 23 years. 2024Q1's market sales continued to show a positive trend.
By business, the company's decorative base paper/wood pulp trade achieved revenue of 31.07/824 billion yuan respectively in 2023, an increase of 30.35%/-14.89% year-on-year. 1) Decorative base paper: In 2023, the company's decorative base paper production capacity continued to grow, and the special paper production line expansion project (phase I) with an annual output of 180,000 tons was successfully put into operation. By the end of 2023, the production capacity reached 350,000 tons. In '23, the company continued to have strong production and sales, and the capacity utilization rate remained high. The production of decorative base paper was 310,300 tons, an increase of 27.83% over the previous year; it achieved sales volume of 305,900 tons, an increase of 34.18% over the previous year. 24Q1 pulp prices increased month-on-month, the company has excellent ability to transfer costs downstream, and the overseas share continues to increase. We expect prices to remain resilient. 2) Wood pulp trade: Since 23Q3, pulp prices have rapidly rebounded from the bottom of history to the middle of history. We expect wood pulp trade revenue to recover sequentially from quarter to quarter.
Product structure optimization, profit center moving upward
In terms of profitability, the company's gross margin was 19.05% in 2023, up 0.58pct year-on-year.
23Q4's gross margin was 22.11%, up 4.56pct year-on-year. 24Q1 gross sales margin was 20.16%, up 6.08pct year over year. In '23, the company's domestic and foreign gross margins were 16.8%/28.5% respectively, up -0.7 pct/4.5 pct year-on-year respectively. The company's foreign gross margin has improved, and the overseas share has increased to optimize the channel structure, and hoard pulp at low prices to control inventory to a certain extent, hedging the rapid upward pressure on pulp prices since 23Q3.
In terms of period expenses, the company's sales period expense ratio for the first quarter of 2024 was 3.96%, a slight increase from 3.69% in the same period of 2023, and an increase of 0.27 percentage points over the previous year. Sales/management/R&D/finance expenses were 0.45%/0.95%/-0.34%/2.90%, respectively. In 2023, Huawang Technology's sales period cost rate was 3.69%, an increase of 0.85pct over the previous year. Sales/management/R&D/finance expenses were 0.61%/1.31%/3.04%/-1.27%, respectively, +0.06/+0.19/+0.54/+0.05pct, respectively.
Under the combined influence, the company's net sales margin in 2023 was 14.21%, up 1.57pct year on year; 2023Q4's net profit margin was 17.06%, up 2.69pct year on year. 2024Q1 net sales margin was 15.42%, up 3.7 pct year over year.
Investment advice: The company is a leader in the field of decorative base paper, with outstanding technology research and development capabilities, cost control in place, and full of profit resilience. Along with the optimization of the high-end decorative base paper industry pattern, the company's production capacity is steadily expanding and continuously expanding various categories, and future performance is expected to continue to grow. We expect Huawang Technology's revenue for 2024-2026 to be 45.80, 54.98, and 6.296 billion yuan, up 15.20%, 20.03%, and 14.52% year-on-year; net profit to mother will be 6.75, 8.14, and 934 million yuan, up 19.27%, 20.52%, and 14.78% year-on-year. The corresponding PE is 11.5X, 9.5X, and 8.3X, with a target price of 28.06 yuan, maintaining the buy-A investment rating.
Risk warning: repeated epidemics, sharp fluctuations in raw material prices, falling short of expectations in production capacity investment, falling short of expectations, category expansion falling short of expectations, deterioration of the overseas trade environment, and increased industry competition.