2024 and 1Q25 results miss our and market expectations

Wuzhou Special Paper Group announced its 2024 and 1Q25 results. In 2024, revenue was about Rmb7.66bn, and net profit attributable to shareholders rose 33% YoY to Rmb362mn. In 4Q24, revenue and attributable net profit totaled Rmb2.19bn and Rmb35mn. In 1Q25, revenue was about 1.99bn, and attributable net profit fell 52% YoY to Rmb65mn. The results missed our and market expectations due to weak demand and low paper prices.

New production capacity at Hubei production base ramped up, but paper prices weighed on profit. In 2024, the firm's overall sales volume rose 38.72% YoY to about 1.47mnt, mainly due to the addition of three production lines for industrial packaging paper in Hubei (PM11, PM15 and PM16, with designed capacity of 680,000t). The firm announced that these production lines recorded sales volume of 316,800t, which is an important revenue growth driver for the firm in 2024. We estimate the firm’s overall ASP at Rmb5,224/t in 2024, down Rmb473 YoY (partly dragged by new industrial paper products). We estimate its ASP at Rmb4,469/t in 4Q24.

Net profit per tonne remained low. We estimate gross profit per tonne and net profit per tonne were Rmb516/t and Rmb265/t in 2024, down by Rmb77 and Rmb50 YoY. We calculate the firm’s gross profit per tonne and net profit per tonne were Rmb251/t and Rmb71/t in 4Q24. Given falling inventory costs in 1Q25, we think its profit per tonne recovered QoQ in 1Q25.

Capex remained high. As of end-2024, net operating cash flow was - Rmb96mn, and capex was Rmb2.06bn (+Rmb474mn YoY), as the firm advanced construction of new production bases; the firm's gearing ratio was 69%. The firm's capex stood at Rmb566mn in 1Q25.

Trends to watch

Accelerating construction of new production bases to build a full product portfolio consisting of pulp and paper. In the near term, we think paper prices lack supportive factors, given weak demand and lower pulp prices. We suggest paying attention to potential price hikes driven by consumption policies.

In the medium and long term, the firm has accelerated the construction of　　new production bases since 2024. On the one hand, it has expedited construction of bulk paper production capacity (680,000t of industrial paper production line put into operation in 2024 and 550,000t of corrugated paper production line coming online in 1Q25) to expand its production capacity and enrich its product portfolio of bulk paper and specialty paper products. As of end-2024, the firm's production capacity reached about 2.13mnt. In its 2024 results announcement, the firm said it plans to put three paper production lines in Hubei and one in Jiangxi into operation in 2025. According to its 2024 results report, the firm expects its production capacity to exceed 2.8mnt in 2025.

On the other hand, the firm is increasing its self-supply of raw materials by leveraging its own pulp, which we believe could strengthen its cost advantage in the long term. However, we suggest watching marginal changes in its cash flow and liabilities, as the firm's capex is high due to concentrated capacity expansion.

Financials and valuation

Given weak demand and sluggish paper prices, we cut our 2025 earnings forecast 37% to Rmb376mn, and introduce our 2026 earnings forecast of Rmb389mn. The stock is trading at 14.8x and 14.3x 2025e and 2026e P/E. We lower our target price 13% to Rmb13, implying 16.5x and 15.9x 2025e and 2026e P/E, offering 12% upside. As the firm remains competitive in the medium and long term thanks to its integrated pulp-paper business, we maintain OUTPERFORM rating.

Risks

Disappointing demand; sharper-than-expected fluctuations in pulp prices; new capacity weighing on earnings; deteriorating cash flow.