XIANHE CO LTD(603733):UPBEAT ON EARNINGS RECOVERY QOQ

类别:公司 机构:中国国际金融股份有限公司 研究员:Qing GONG/Peihang LV/Yan CHEN/Maoda YANG 日期:2023-05-09

  1Q23 results miss our and market expectations

      Xianhe Co Ltd announced its 1Q23 results: Revenue rose 9.5% YoY to Rmb1.84bn. Net profit attributable to shareholders fell 16% YoY to Rmb122mn. Recurring net profit dropped 13% YoY and grew 22% QoQ to Rmb115mn, missing our and market expectations due to continued increase in wood pulp cost.

      Comments: Shipments were slow in slack season, and prices once again showed resilience. We estimate sales volume in 1Q23 fell 20% QoQ to 180,000t (given the high base caused by stocking up for 2023 Chinese New Year holiday in 4Q22, and typical slack season in 1Q23)。 In 1Q23, the firm raised prices of some products such as glassine paper, and the overall ASP rose slightly QoQ.

      Pulp price pressure continued to weigh on net profit per tonne. Thanks to the firm's raw material procurement strategy, GM rose 1.1ppt QoQ to 10% in 1Q23. Net margin rose 0.2ppt QoQ to 6.6%, and net profit per tonne at headquarters was only Rmb400-500/t.

      Kingdecor's net profit per tonne recovered QoQ. Considering 1Q23 is a typical slack season, we estimate the firm's shipment at around 75,000t, but its net profit per tonne recovered to Rmb1,000/t due to price hikes of some products and falling costs of core raw materials. We expect Kingdecor to become a major earnings driver in 2023.

      Inventory surged, but gearing ratio is manageable. Inventory rose Rmb599mn YoY, mainly due to stockpiling of wood pulp raw materials. Debt-to-asset ratio stood at 52%, and net gearing ratio was 48% in 1Q23.

      Cash flow faced short-term pressure, and capacity expansion remained in full swing. In 1Q23, net operating cash flow dipped 736% YoY to -Rmb680mn, mainly due to stockpiling of low-price wood pulp and equipment purchase. Capex came in at Rmb569mn. We note that the firm's planned capex for new production bases in Hubei and Guangxi reached over Rmb10bn in recent years, and its cash flow and financial expenses may remain under pressure. We believe the firm still has high demand for external financing.

      Trends to watch

      Net profit per tonne to recover quarter by quarter in 2023. According to the firm's announcement, the 300,000t food-grade paperboard project started operation in early April, and another 80,000t special paper project is scheduled to come on stream. We think these new projects may drive full-year sales volume up 20% YoY to 1mnt. In 2-4Q23, we expect end-market demand to recover only mildly and wood pulp prices to drop further.

      We think the paper price will decline by a smaller margin compared with pulp price, creating earnings boost from price difference. We maintain our forecast that net profit per tonne will likely recover QoQ in 2023, and earnings upside may mainly depend on paper prices driven by end-market demand.

      Capacity expansion to accelerate in 2024-2025; Hubei and Guangxi projects to support medium-term growth. According to the firm's announcement, the 700,000t pulp project may come online between late 2023 and early 2024, which should raise the firm’s pulp self-sufficiency rate from less than 15% to more than 50%. We expect this to smooth cost fluctuations and stabilize profit margin amid medium to long term increase in pulp ASP.

      We are upbeat on the firm's efforts to build an integrated pulp-and-paper project in Hubei and Guangxi after 2024. We expect its sales volume to grow at a CAGR of over 20% in the medium term. Moreover, development of new product categories may boost profit margin, and the firm’s advantages in the integrated forest-pulp-paper value chain may strengthen further.

      Financials and valuation

      We keep our 2023-2024e earnings forecasts unchanged. The stock is now trading at 14x 2023e and 11x 2024e P/E. We maintain OUTPERFORM and target price of Rmb32, implying 19x 2023e and 15x 2024e P/E, offering 32% upside.

      Risks

      Sharper-than-expected decline in pulp prices; disappointing end-market demand; intensifying competition.