3Q23 results in line with our expectations Wuzhou Special Paper Group announced its 3Q23 results: Revenue

rose 16% YoY (or 15% QoQ) to Rmb1.82bn, and attributable net profit surged 1,054% YoY (or 574% QoQ) to Rmb0.12bn, in line with our expectations.

Comments: Output and sales booming; ASP fell slightly QoQ. We estimate the

firm’s overall sales volume at 0.32mnt in 3Q23, up 0.07mnt QoQ, partly contributed by sales of inventories. The firm expects its full-year sales volume to reach 1-1.05mnt. We roughly estimate its ASP at Rmb5,600/t, down QoQ mainly due to falling prices of some products at early-2-3Q23 and adjustments in product mix.

Per-tonne net profit on track to recover thanks to the use of low-cost

raw materials. The firm has begun to use low-cost raw materials since June as inventories of high-priced pulp and raw materials were depleted.

This has translated into the firm’s earnings from the pulp-paper price scissors in 3Q23, and we estimate the firm’s net profit per tonne rose by about Rmb300/t QoQ in 3Q23.

Financials: Net operating cash flow surged 109% YoY to Rmb0.56bn in 1-3Q23, mainly due to rising collection of time deposits and reversal of deposits. The liability-to-asset ratio was 67.5% in 3Q23. The firm announced that it plans to spend about Rmb10bn in the construction of its production base in Hubei. We expect the firm to remain under cash flow pressure in the next two years.

Trends to watch Upbeat on continued recovery in net profit per tonne in 4Q23. In

4Q23, we expect the use of low-cost pulp and price hikes of some paper categories to amplify the earnings from the pulp-paper price scissors.

According to the firm’s announcement, its 300,000t/yr chemi-mechanical pulp project in Jiangxi has started trial production, and may gradually contribute incremental earnings in 4Q23, as its 500,000t/yr food cardboard CMP capacity in Jiangxi can largely meet demand.

Kan Specialities Material announced that it sold a 75% stake in Kaifeng Special Paper (Kaifeng) to Wuzhou. Wuzhou announced the completion of consolidation of financials in September. We expect the consolidation of Kaifeng can help Wuzhou improve its product mix and create incremental earnings as the former operates the lining paper business.

We expect Wuzhou to accelerate the expansion of its production

base in Hubei in 2024. The firm plans to add 18,000t/yr tracing paper capacity by the end of 2023, and expects to start building its Phase I project in Hubei in 1H24 with total containerboard and corrugated board capacity of 0.6mnt.

The firm’s production base in Jiangxi is capable of manufacturing packaging paper and has well-established raw material procurement and sales channels. Once the project in Hubei starts production, we think it will enrich Wuzhou’s product portfolio, elevating its sales volume and profit to new highs and making the firm a pulp-paper integration leader that is capable of producing both special paper and pulp-based and old corrugated cardboard-based paper.

Financials and valuation

Given weak demand recovery, we slightly lower our 2023 and 2024 earnings forecasts both by 6% to Rmb0.27bn and Rmb0.56bn. The stock is trading at 11x 2024e P/E. We maintain OUTPERFORM, and roll over valuation to 2024. We maintain our target price of Rmb20, implying 14x 2024e P/E, offering 29% upside.

Risks

Pulp prices rise more than expected; demand recovery disappoints; new production capacity beats expectations.