2024 results slightly miss our expectations; 1Q25 results in line

Xianhe Co., Ltd. (Xianhe) announced its 2024 and 1Q25 results. In 2024, revenue rose 20% YoY to Rmb10.27bn and attributable net profit grew 51% YoY to Rmb1.004bn. Its 2024 results miss our expectations, mainly due to weak price performance. In 1Q25, revenue rose 35% YoY to Rmb2.99bn, and attributable net profit fell 12% YoY to Rmb236mn, in line with our expectations.

Comments: 1) Production and sales volume increased steadily thanks to new production bases. In 2024, the firm's production and sales volume increased 16.28% and 28.29% YoY to 1.21mnt and 1.22mnt, and we estimate its overall sales volume in 1Q25 at around 0.35-0.4mnt.

2) Prices remained under pressure. In 2024, the firm's overall product ASP dropped 8% YoY to Rmb8,070/t, with ASP of daily consumer goods falling 3% YoY to Rmb8,558/t. Given the pressure on supply and demand of some products, we estimate that the firm’s overall product ASP fell QoQ in 1Q25.

3) Gross profit per tonne recovered YoY thanks to cost improvement. In 2024, the firm's gross profit per tonne rose Rmb225 YoY to Rmb1,248/t. In the short term, we think paper prices may lack support amid the rapid decline in upstream pulp prices and weak supply and demand conditions for some products. Therefore, we anticipate that earnings of the firm may be under pressure. We suggest watching the performance of paper prices amid falling pulp prices. In the medium and long term, we expect the firm to continue to strengthen its cost advantage as the integration of its pulp and paper businesses in Hubei and Guangxi proceeds.

4) Net profit per tonne remained high at Kingdecor. In 2024, Xianhe’s investment income fell 14% YoY to Rmb181mn, and we estimate full-year output and sales volume of Kingdecor at around 350,000t, implying net profit per tonne of around Rmb1,000/t.

5) Financials: In 2024, net operating cash flow was Rmb402mn, and capex was Rmb3.9bn, mainly due to the expansion of new bases in Hubei and Guangxi. Capex for the two new bases were high in 2024, and the firm’s liability-to-asset ratio reached 65%. In 1Q25, the firm's asset and credit impairments totaled Rmb50mn, mainly due to increased inventories at new production bases, volatile market prices, and increased accounts receivable.

Trends to watch

Xianhe may continue to expand production capacity in 2025. According to corporate filings, the firm’s pulp and paper production capacity exceeded 2mnt as of end-2024, and it continuef to build production capacity in Guangxi and Hubei. In 2024, Guangxi Xianhe produced 103,200t of wood pulp and 29,000t of specialty paper, and Hubei Xianhe produced 59,800t of pulp and 93,400t of specialty papers. We believe this can increase the firm's production and sales volume and help enhance its cost advantage through integrated pulp-paper operation. The firm guided that its Phase I projects in Guangxi and Hubei will be put into operation in 2025, and the construction of the Phase II project in Guangxi will begin. By then, the firm's production capacity will likely exceed 3mnt, and we expect its output to grow more than 20% in 2025.

From a medium-to-long-term perspective, forest-pulp-paper integration is the trend. The firm is expanding its presence to upstream sectors to improve cost advantage. In the long term, we expect Xianhe to improve its ability to reduce costs along the value chain on the back of product diversification, capacity expansion, and leading position.

Financials and valuation

We keep our 2025 net profit forecast unchanged and introduce our 2026 earnings forecast of Rmb1.33bn. The stock is trading at 13.4x and 11.7x 2025e and 2026e P/E. We maintain an OUTPERFORM rating and our TP of Rmb25, implying 15x and 14x 2025e and 2026e P/B and offering 14% upside.

Risks

Disappointing demand; sharper-than-expected fluctuations in pulp prices; new supply higher than expected.