Event: The company released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 3.431 billion yuan, +20.76% year-on-year; net profit of 0.232 billion yuan, which turned a year-on-year loss into a profit; deducted non-net profit of 0.224 billion yuan, which turned a year-on-year loss into a profit; and basic earnings per share of 0.58 yuan. In 24Q2, the company achieved revenue of 1.705 billion yuan, +7.71% year over year; net profit to mother 0.099 billion yuan, +457.68% year over year; after deducting non-net profit of 0.093 billion yuan, +626.41% year over year.

Profitability improved year over year, and there was a slight month-on-month decline in Q2.

The commissioning of chemical machine pulp combined with a drop in the price of wood pulp led to an increase in gross margin. During the reporting period, the company's comprehensive gross margin was 12.1%, +6.83pct year-on-year. In 24Q2, the gross margin for the single quarter was 11.24%, +4.49pct year over year, and -1.72pct month-on-month.

Increased investment in R&D led to a slight increase in cost rates. In the first half of 2024, the company's expenses rate for the period was 4.85%, +0.53 pct year-on-year. Among them, sales/management/R&D/finance expenses rates were 0.2%/1.38%/1.58%/1.69%, respectively, with year-on-year changes of -0.02pct/+0.11pct/+0.41pct/+0.03 pct

In the first half of 2024, the company deducted non-net interest rate of 6.54%, +6.59pct year-on-year. In 24Q2, the company deducted non-net interest rate of 5.45%, +4.64pct year over year, and -2.18pct month-on-month.

Continue to expand scale effects and diversify products. In the first half of 2024, the company produced 0.5808 million tons of machine-made paper and sold 0.5661 million tons, +20.57% and +32.82% year-on-year respectively; domestic/export sales reached 2.944/0.487 billion yuan respectively, +18.23%/+38.73% year-on-year respectively. During the reporting period, the food packaging materials series, the consumer materials series, the publishing and printing materials series, and the industrial supporting materials series achieved revenue of 15.99, 1.176, 0.512, and 0.137 billion yuan respectively. As of the end of the reporting period, the production design capacity was 78, 0.301, 0.3, and 0.035 million tons, respectively. Meanwhile, as of the disclosure date of the report, 2 production lines and 1 production line for the industrial packaging materials series have been put into trial production. The production capacity is expected to be close to one million tons after completion in the future.

The integrated strategic layout of pulp and paper is implemented to achieve cost savings. The company began construction of a chemical slurry production line at the Jiangxi base in August 2021. The trial production was successful at the end of 2023, and officially put into use in early 2024. By the end of the reporting period, 0.3 million tons of machine pulp had basically been produced. The company continues to thoroughly explore the production capacity model of chemical pulp. It has basically achieved a balance between food white cardboard and cultural pulp paper, and achieved cost savings. It is expected that there is still room for improvement as the model matures further in the future.

Investment suggestion: The company is a leader in the specialty paper industry, with diversified horizontal product development, integrated vertical layout of pulp and paper, and capacity construction to help scale up rapidly. The company is expected to achieve basic earnings per share of 1.34/1.75/2.09 yuan in 2024/25/26. The corresponding PE is 9X/7X/5X, maintaining the “recommended” rating.

Risk warning: the risk of a sharp rise in raw material prices, the risk of production capacity falling short of expectations, the risk of falling product prices, and the risk of increased market competition.