2Q25 results in line with our expectations

Sun Paper announced its 1H25 results: Revenue fell 6.87% YoY to Rmb19.11bn and net profit attributable to shareholders rose 1.26% YoY to Rmb1.78bn, with attributable net profit at Rmb894mn in 2Q25, in line with our expectations.

Printing and writing (P&W) paper: 2Q is the traditional peak season for P&W paper. According to RISI, the ASP of offset paper and coated paper fell 3.2% and 4.8% QoQ in 2Q25. However, pulp costs have fallen slightly.

We believe profit per tonne of P&W likely remained stable in 2Q25.

Linerboard: The firm's production base in Shandong targets the high-end market, and its production base in Nanning is improving its product mix and raw material mix. We think overall profit likely grew steadily.

Dissolving pulp: According to corporate filings, the firm relocated its dissolving pulp production line from Shandong to Beihai, Guangxi province in April. We think this production line completed ramp-up and gradually contributed profit at end-2Q25. We believe the relocation and technological upgrading could enable the firm to fully leverage regional advantages in Beihai in Guangxi province to further reduce costs. In our view, technological upgrading may help the firm boost production and sales volume. Meanwhile, another dissolving pulp line in Shandong can flexibly switch to natural-color pulp and other products according to market conditions, strengthening the firm’s presence in raw materials in Shandong.

Peak period for capex: In 1H25, operating cash flow fell 37.42% YoY to Rmb1.89bn; capex was Rmb4.73bn. The Guangxi base is still expanding.

The firm’s liability-to-asset ratio was 46.01% at end-1H25.

Trends to watch Watch P&W paper prices in 3Q25; earnings likely under slight

pressure QoQ. As 3Q is a traditional slack season for P&W paper, and competitor Nine Dragons' new production capacity in Beihai gradually ramps up, we expect P&W prices to face significant QoQ pressure in 3Q25. According to RISI, the ASP of offset paper and coated paper has fallen by Rmb160 and Rmb286 QoQ to Rmb5,451/t and Rmb5,639/t since the beginning of 3Q. However, we think the firm's net profit per tonne narrowed only slightly in 3Q25 due to falling pulp costs. We note that　　industry linerboard prices have recovered well in southern China due to “anti-involution” efforts of express delivery companies and price hikes in the peak season. We expect net profit per tonne of linerboard to rise slightly in 3Q25. In addition, we think ramp-up of dissolving pulp may boost profit growth. We expect the firm's quarterly output and sales volume to grow more than 10% QoQ in 4Q25 as its 1mnt linerboard, 400,000t specialty paper, and 150,000t household paper capacity comes online. We think this may drive the firm’s QoQ earnings growth.

Synergies among three production bases. For its Laos base, the firm

announced in its 2023 annual report that forestland planting entered the fast track in 2023, and it plans to add more than 10,000 hectares of forestland planting area annually in the near term. Sun Paper is the only domestic frontrunner with ample forestland reserves overseas which are contributing to the firm’s revenue. We believe Sun Paper's cost advantage could continue to rise.

Guangxi base: The firm announced that its Phase I and Phase II projects in Nanning could be largely completed by end-2025, and the two industrial parks in Beihai and Nanning in Guangxi will likely achieve coordinated development.

For the Shandong base, the firm announced that it would add 700,000t of high-end packaging paper and 600,000t of chemical pulp, with capex up to Rmb1.53bn and Rmb3.51bn, respectively. In the medium and long term, we are optimistic that the company may enjoy long-term excess returns thanks to its clearer cost advantage, better management, and sound product system.

Financials and valuation

Given the concentration of new production capacity at year-end, we raise our 2025 and 2026e earnings forecasts 8.2% and 9.4% to Rmb3.4bn and Rmb3.7bn. The stock is trading at 12.1x 2025e and 11.2x 2026e P/E.

Given possible weakening of P&W paper prices in 3Q25 and decline in risk appetite, we maintain OUTPERFORM and TP of Rmb18, implying 14.6x 2025e and 13.5x 2026e P/E, implying 21% upside.

Risks

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