SUN PAPER(002078):TAILWINDS FROM BOTH PULP AND PAPER;REASONS FOR OPTIMISM ABOUT 2H23

类别:公司 机构:中国国际金融股份有限公司 研究员:Qing GONG/Yan CHEN/Maoda YANG 日期:2023-03-03

  Preannounced 2022 net profit at Rmb2.78bn, in line with our estimate

      Sun Paper preannounced its 2022 results: Revenue rose 25% YoY to Rmb39.95bn, and attributable net profit fell 6% YoY to Rmb2.78bn in 2022. In 4Q22, net profit fell 16% QoQ to Rmb510mn, in line with our expectations.

      Main business bottomed; low costs and strong raw material resource to boost growth. In 2022, the papermaking sector was in a downturn but the firm's pulp business trended upwards. We believe dissolving pulp and chemical pulp were the major sources of earnings in 4Q22. According to iFind, the average selling price of dissolving pulp in 4Q22 exceeded Rmb8,000/t. We estimate the cost of dissolving pulp at the firm's domestic and Laos production bases at lower than Rmb7,000/t and Rmb6,000/t. We expect the firm’s strong cost advantages to boost earnings growth in 2023. The firm has been cutting costs and controlling expenses for many years, providing a strong margin of safety at cyclical bottoms.

      Leader in printing and writing (P&W) paper remain resilient. We estimate that Sun Paper’s P&W paper was only slightly profitable per tonne in 4Q22, but the business remained much more resilient than those of peers. We attribute the resilience to a high self-sufficiency rate for pulp and effective cost control.

      Clear strategy for containerboard; business at bottom but not drag to overall earnings. We estimate that the firm’s containerboard business broke even in 4Q22 despite a sector bottom (some rivals suffered losses of over Rmb150/t). Unlike peers who focus on seizing market share, Sun Paper targets mid-range and high-end containerboard and aims to maintain profitability or at least break even.

      Trends to watch

      Recovery to start in 2Q23; upbeat on 2H23 earnings growth. P&W paper. We estimate P&W sector earnings fluctuated at a bottom in January and mid-February, with tendering starting in some regions in late February. We expect paper prices to rise in peak season in March. Given expectations for falling pulp and coal prices, we expect the P&W paper sector to start recovering in 2Q23.

      Containerboard. Despite falling prices for coal and domestic waste paper, we believe sector earnings hovered around breakeven in 1Q23. This is because expensive raw material inventory was drawn down and cheaper imported containerboard and corrugating medium entered the market and made it harder for firms to raise prices. However, we expect Sun Paper’s Laos base to recover ahead of schedule and contribute incremental earnings in 2023 thanks to lower wastepaper prices in the US.

      Pulp. We expect pulp prices to fall in 1-3Q23, and Sun Paper’s earnings in the pulp business may drop YoY. Sector-wide pulp and paper sales may both be weak in 1H23. However, we expect the firm’s pulp and paper business to be strong in 2H23. A recovery in domestic demand may boost paper prices and pulp prices may bottom out thanks to rising demand and large new papermaking facilities.

      Improving forest-pulp-paper integration; production facilities in Nanning (Guangxi) to boost medium-term growth. Sun Paper has more than 10mnt/yr paper and pulp capacity and continues to improve forest-pulp-paper integration. Moreover, the firm has expanded production capacity despite a sector downturn and has announced plans to build a 5.25mnt forest-pulp-paper integrated project in Nanning (phase 1 project: 2.2mnt high-end packaging paper and 650,000t self-produced pulp). The firm’s total production capacity for paper and pulp will amount to over 15mnt/yr once the Nanning project starts operation, covering a full range of packaging paper, printing & writing paper and specialty paper.

      In the medium term, we think high-quality fiber and proximity to ports are likely to become increasingly rare in the industry. We are upbeat on the firm’s strong margin of safety and potential upside in the medium term, considering its strong competitive advantages in Shandong and Guangxi provinces, forest resources in Laos, high-quality fiber resources, clear division of work among its three major production bases, and rare forest resources.

      Financials and valuation

      Given the cost pressure in 4Q22, we cut our 2022 net profit forecast by 2% to Rmb2.8bn. Given a possible demand recovery in 2H23, we raise our per-tonne net profit assumption and 2023 net profit forecast 9% to Rmb3.2bn, and introduce a 2024 net profit forecast of Rmb3.5bn. The stock is trading at 11x 2023e and 10x 2024e P/E. As risk appetite remains weak in the sector, we maintain our OUTPERFORM rating and target price of Rmb16 (14x 2023e and 13x 2024e P/E), offering 27% upside.

      Risks

      Demand falls short of expectations; intensifying competition; sharper-than-expected fluctuation in raw material and energy prices.