1Q25 results miss our expectations

Huawang New Material Technology its 2024 and 1Q25 results: In 2024, revenue fell 5.2% YoY to Rmb3.77bn. Attributable net profit fell 17.2% YoY to Rmb469mn. In 1Q25, revenue fell 10.89% YoY to Rmb848mn, and net profit attributable to shareholders fell 45% YoY to Rmb0.08bn, missing our expectations, mainly due to weak demand and pressure on prices.

Production and sales volume continued to grow: Output and sales volume in 2024 rose 6.6% and 4.5% YoY to 332,000t and 322,000t, mainly due to the ramp-up of new production capacity.

Price pressured by competition; export business resilient: In 2024, ASP fell 11% YoY to Rmb9,044/t, mainly due to weak supply and demand for decorative base paper in China and intensifying market competition. In 2024, export revenue rose 0.99% YoY and accounted for 21% of total revenue, and gross margin was 22.93% (vs. domestic gross margin of 13.87%).

Net profit per tonne remained high: In 2024, we estimate the firm's net profit per tonne at Rmb1,300/t, still a historical high to peers, despite a sharp YoY decline. We attribute this to the more resilient price system for mid-range and high-end paper. However, from a longer-term perspective, we think Rmb1,000/t is an ideal level for decorative base paper, due to intensifying competition.

High-quality financial statements: In 2024, the firm reported operating cash flow of Rmb516mn (+17.66% YoY) and capex of Rmb0.23bn. The firm is expanding production capacity steadily. We expect its capex in 2025 to remain low amid weak demand. The firm's debt-to-asset ratio stood at 35% at end-2024. Operating cash flow turned negative in 1Q25 due to concentrated payment for raw materials.

Trends to watch

Profit per tonne of paper to continue recovering in 2Q25; volume growth to continue in 2025. Decorative base paper prices may be under pressure in the near term due to weak domestic demand and capacity expansion. However, we expect the firm's earnings per tonne to rise steadily in 2Q25 thanks to its solid pricing system for high-end products and falling inventory costs. We expect the ramp-up of the firm's new 80,000t production capacity in 2024 to boost its full-year output and sales volume by more than 15%.

Attractive dividend payout. The firm's cash dividend payout ratio reached 37% in 2022, 65% in 2023, and 86% in 2024, underscoring the firm's strong organic cash flow and its efforts to reward shareholders. We expect the overall supply and demand for decorative base paper to be weak in 2025. However, we expect the firm's earnings to remain resilient given its leading position in the mid-range and high-end paper markets. The firm has no capex for large projects in 2025. We expect the firm to maintain a high dividend payout ratio this year. Based on a dividend payout ratio of 86% (on par with that in 2024), we estimate a dividend yield of 6.2% for 2025.

Financials and valuation

Given weak supply and demand for decorative base paper, we lower our 2025 earnings forecast 34% to Rmb391mn and introduce our 2026 earnings forecast at Rmb457mn. The stock is trading at 14x 2025e and 12x 2026e P/E. The firm is a leading producer of mid-range and high-end base paper, and we are upbeat on its medium- and long-term growth potential and dividend payout. We maintain an OUTPERFORM rating and cut our target price 13% to Rmb13. Our TP implies 15x 2025e and 13x 2026e P/E, offering 11% upside.

Risks

Weaker-than-expected demand; industry-wide price competition; sharper- than-expected fluctuations in costs.