2024 results in line with our expectations

Sun Paper announced its 2024 results: Revenue rose 3% YoY to Rmb40.73bn, and net profit attributable to shareholders grew 0.5% YoY to Rmb3,101mn (including Rmb644mn in 4Q24), largely in line with our expectations.

The firm's paper output and sales volume in 2024 rose 14.4% and 12.8% YoY to 7.57mnt and 7.51mnt, mainly due to the ramp-up of linerboard capacity in Guangxi. We estimate full-year average paper price fell Rmb356/t YoY to Rmb4,138/t, and gross profit per tonne dropped Rmb94/t YoY to Rmb577/t.

In 2024, the firm's external pulp output was flat YoY at 1.44mnt, and sales volume fell 2% YoY to1.46mnt. In the past two years, the firm has been focusing on the group, and its external pulp consumption has been stable. Gross margins of chemical pulp, and dissolving pulp are 23%, 25%, and 24%, with gross profit per tonne of pulp at Rmb1,173/t.

Capex remained high. In 2024, operating cash flow rose 28.4% YoY to Rmb8.5bn, and capex reached Rmb5.58bn as expansion of the Guangxi production base continued. Liability-to-asset ratio fell 3ppt YoY to 45%, and dividend payout ratio remained stable at 27%. The firm announced that it has proposed 2025 interim dividend payout plan to the board of directors, and it plans to increase the frequency of dividend payouts based on the firm's actual conditions.

Trends to watch

Upbeat on QoQ earnings recovery in 1-2Q25. According to RISI, ASP of offset paper and coated paper rose Rmb123/t and Rmb217/t QoQ in 1Q25. Paper prices began to recover slowly from end-November 2024 amid a large-scale production halt at Chenming, and a slight recovery in demand. We expect 1Q25 earnings to recover QoQ along with paper prices. In addition, as 2Q is the peak season for P&W paper bidding and the firm expects to complete its relocation of the dissolving pulp project in April, we expect the firm's profit to continue recovering QoQ. It is worth mentioning that the relocation and technological upgrading help further reduce costs (especially for wood chips). Meanwhile, technological upgrading may also boost production and sales volume.

Synergies between three production bases strengthened; forest-pulp- paper integration mitigates cyclical earnings fluctuations. The firm announced that it plans to accelerate tree-growing at its Laos production base, and add more than 10,000 hectares of forestland planting area annually in the short term. We believe Sun Paper is the only domestic company that owns ample forest land reserves overseas, and its cost advantage is strengthening.

Guangxi base: The firm announced that its Phase I and Phase II projects in Nanning will be largely completed by end-2025, and the two industrial parks in Beihai and Nanning in Guangxi will likely achieve coordinated development. In the medium and long term, we are optimistic that the company may deliver excess returns thanks to its strong cost advantage, efficient management, and strong product mix.

Financials and valuation

Given possible weak demand in 2H25, we lower our 2025 and 2026 earnings forecasts 6% and 6% to Rmb3.17bn and Rmb3.39bn. The stock is now trading at 12.3x 2025e and 11.5x 2026e P/E. Given the firm's advantages in integrated value chain, we maintain our OUTPERFORM rating and target price of Rmb18, implying 15.9x 2025e and 14.9x 2026e P/B, offering 28.6% upside.

Risks

Disappointing demand; sharper-than-expected fluctuations in costs and/or new production capacity; risks related to overseas base operations.