1Q25 results beating our and market expectations

Sun Paper announced its 1Q25 results: Revenue fell 2.82% YoY to Rmb9.90bn and net profit attributable to shareholders fell 7.32% YoY to Rmb886mn, beating our and market expectations, mainly due to P&W paper price hikes and effective cost control.

1) Profit per tonne of paper recovering: According to RISI, average

prices of offset paper, coated paper, and linerboard rose Rmb122, Rmb211, and Rmb65/t QoQ in 1Q25, and inventory pulp cost fell. We expect profit per tonne of paper to recover QoQ, especially for P&W paper. Except for Yanzhou Dissolving Pulp, which was relocated to Guangxi, we think production and sales of other production lines remained stable QoQ.

2) Stable sales volume of pulp sold to third parties: Annual

production capacity of pulp sold to third parties reached 1.44mnt over 2023-2024. The firm mainly sells pulp to parent company, with sales and earnings stable. 3) Capex still at its peak: In 1Q25, operating cash flow fell 79% YoY to Rmb124mn; capex reached Rmb1.97bn, and the Guangxi base was at a peak of expansion; debt-to-asset ratio was 46%.

The firm announced in April that it proposed to authorize the board of directors to formulate a 2025 interim dividend plan and increase the frequency of dividends based on the conditions of business operations.

We believe the firm is financially able to increase its dividend payout ratio after the capacity expansion peak passes.

Trends to watch Earnings to improve QoQ in 2Q25. Data from RISI show that ASP of

offset paper and coated paper in April were Rmb5,775/t and Rmb6.071/t as of April 23, -Rmb19 and +Rmb44 from ASP in 1Q25. P&W paper is in a traditional peak season. However, given the rapid decline in pulp prices and anemic price hikes, we expect prices to remain stable, and falling costs to boost recovery of profit per tonne in 2Q25.

In addition, the firm announced that it expects to complete the relocation of dissolving pulp in May. We believe the relocation and technological upgrading will make full use of the advantages of Beihai, Guangxi, and　　further reduce costs. Meanwhile, technological upgrading will likely boost output and sales volume.

Synergies between three production bases:

Laos base: The firm announced in its annual report that forestland planting at its Laos base entered a fast track in 2023. The firm plans to accelerate the construction of fast-growing forests at the Laos base in the long term. In the near term, the firm plans to increase forestland planting area by more than 10,000 hectares per year. Sun Paper is the only domestic frontrunner with ample forest land reserves overseas, and its cost advantage is strengthening. We expect this asset to be revalued based on resource products.

Guangxi base: The firm announced that its Phase I and Phase II projects in Nanning will be completed by end-2025, with 1mnt of high-end packaging paper and 150,000t of household paper coming online in 4Q25.

Shandong base: The firm announced that it will start trial production of 37,000t specialty paper in April 2025, and the Yandian Phase II project is scheduled to start trial production in 1H26. In the medium and long term, we are upbeat on the firm’s long-term excess returns thanks to its clearer cost advantage, better management and sound product system.

Financials and valuation

We keep our earnings forecasts and ratings unchanged. The stock is trading at 12.5x and 11.7x 2025e and 2026e P/E, and maintain OUTPERFORM and TP of Rmb18, implying 16x and 15x 2025e and 2026e P/E, offering 27% upside.

Risks

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