2Q24 results in line with our expectations

Huawang New Material Technology announced its 2Q24 results: Attributable net profit rose 6% QoQ and 21% YoY to Rmb155mn, and recurring net profit was Rmb129mn, including Rmb29mn from government subsidies.

Sales volume growth sustained: We estimate the firm's sales volume rose about 20% YoY to around 85,000t in 2Q24, mainly driven by capacity ramp-up. By market, revenue from domestic sales and exports rose 3.5% and 8.6% YoY in 1H24, with exports accounting for 22% of total revenue.

Stable pricing and product mix adjustment: Huawang has established competitive advantages in mid-range to high-end decorative base paper. Coupled with favorable supply and demand conditions, it helps maintain prices resilience. However, in response to the relatively weak market momentum, the firm adjusted its product mix in time, and raised the proportion of low-end products in total output and sales.

Net profit per tonne still encouraging: We estimate the firm's net profit per tonne at over Rmb1,500 in 2Q24, relatively high. We think the product mix adjustment and rising shipping rates on imports may weigh on its profit in the short term.

Strong dividend: The firm announced a 64.49% interim dividend ratio for 2024, higher than the full-year ratio of 63.94% for 2023. Assuming that the full-year dividend ratio for 2024 is the same the interim dividend ratio, we estimate the dividend yield implied in current stock price is over 7%.

Excellent financial quality: In 1H24, operating cash flow was Rmb177mn, capex was Rmb102mn, and gearing ratio was only 30%.

Trends to watch

Expect rising sales volume and stable prices in 2H24; net profit per tonne to remain solid. The firm plans to put 80,000t of new decorative base paper projects into operation in 3Q24, and we expect full-year sales volume to rise over 10% YoY to around 350,000t. In addition, pulp prices have fallen slightly, and the overall pricing of mid-range to high-end decorative base paper remains stable. We are upbeat on the firm's efforts to stabilize prices and rapid export growth, and expect its profit to continue to grow HoH in 2H24.

Overseas expansion to unleash more growth potential; short-term disruptions limited. According to our statistics, Kingdecor and Huawang have built more than 0.4mnt of new capacity since 2017 (vs. less than 0.1mntt increase in industry-wide demand). Leading producers can maintain high capacity utilization rates amid rapid capacity expansion, mainly thanks to their expanding presence in mid-range to high-end markets and globalization.

In the medium term, we are optimistic about their overseas expansion. Coupled with the rising penetration rate of mid-range to high-end products in China, we think the increment production capacity built by Huawang and Kingdecor may be digested.

The European Commission previously launched an anti-dumping investigation into Chinese decorative paper. Huawang adopts the same- price strategy as European companies, and some of products are priced even higher. In theory, this does not constitute vicious price competition. In addition, Huawang announced that sales to the EU accounted for only a small single-digit share of its total sales volume in 2023.

We think the impact should be limited in the near term, and suggest watching progress of the EU investigation. Following India's anti-dumping measures against China's decorative paper, the additional anti-dumping duty was mostly passed on to customers, and had no significant impact on China's exports to India.

Financials and valuation

Considering a delay of the firm's production capacity expansion, we cut our 2024 and 2025 EPS forecasts 6.6% and 6% to Rmb1.37 and Rmb1.51. The stock is now trading at 8.8x 2024e and 8x 2025e P/E. We maintain OUTPERFORM, and cut our TP 15% to Rmb17 (mainly reflecting lower risk appetite for the papermaking sector in 3Q24), implying 12x 2024e and 11x 2025e P/E, offering 40% upside.

Risks

Disappointing demand; sharper-than-expected fluctuations in costs; unexpected anti-dumping measures.