Results Review

2025 results miss our expectations

Sun Paper announced its 2025 results: Revenue fell 4% YoY to Rmb39.19bn, and net profit attributable to shareholders rose 5% YoY to Rmb3.251bn. In 4Q25, attributable net profit was Rmb751mn, missing our and market expectations, mainly due to weak profit per tonne of printing and writing (P&W) paper.

Paper production and sales volume grew steadily. In 2025, the firm’s paper production and sales volumes grew 7.5% and 6.4% YoY to 8.14mnt and 7.99mnt, mainly driven by new production capacity at the Nanning base. We estimate that the average price of paper fell Rmb216/t YoY to about Rmb3,922/t, with P&W paper prices falling sharply. Gross profit per tonne of paper fell Rmb28/t YoY to Rmb549/t.

Production of dissolving pulp declined; pulp for external sales remained relatively stable. In 2025, the firm’s production and sales volume of pulp for external sales declined 6.3% and 11% YoY to 1.35mnt and 1.3mnt, mainly dragged down by dissolving pulp (production capacity in Shandong shifted to other pulp amid weak demand). Gross margins of the firm’s chemi-mechanical pulp, chemical pulp, and dissolving pulp were 25% (+2ppt YoY), 19% (-1ppt YoY), and 18% (-6ppt YoY). Overall gross profit per tonne of pulp fell Rmb261/t YoY to Rmb864/t.

Capex was high. In 2025, operating cash flow decreased 41.69% YoY to Rmb4.956bn. Capex reached Rmb7.929bn, mainly due to the completion of the Guangxi production base. In 2026, the firm will mainly advance the construction of three production lines in Yandian, Shandong province, and we expect its capex to decline. In 2025, the liability-to-asset ratio rose 2ppt YoY to 48%.

Trends to watch

We expect profit per tonne to continue its weak recovery in 1Q26. Pulp prices have rebounded since July 2025. The firm’s pulp costs have gradually increased, while paper prices have not risen due to weak demand. We estimate that profit per tonne of P&W paper remained under pressure in 1Q26. Meanwhile, we estimate that profit per tonne of linerboard may be better than expected thanks to effective price hikes. Overall, we expect earnings to recover slightly QoQ in 1Q26.

We expect production expansion to drive steady earnings growth in 2026. The firm announced that its 70,000t special paper project in Shandong started production in January 2026, and its 700,000t packaging paper project and 600,000t chemical pulp project are scheduled to start trial production in 3Q26. Taking into account the ramp-up of new production capacity in Guangxi at end-2025, we expect the firm’s paper production and sales volume to grow more than 15% YoY in 2026, laying a foundation for its earnings growth in 2026. Looking ahead, we expect the production base in Laos to gradually bear fruit in the next few years, which is crucial to the firm’s sustainable cost advantage and valuation expansion.

Financials and valuation

As profit per tonne may remain under pressure in 1Q26, we cut our 2026 net profit forecast 6% to Rmb3.46bn. We introduce our 2027 net profit forecast of Rmb3.73bn. The stock is trading at 12x 2026e and 11x 2027e P/E. We maintain an OUTPERFORM rating and our target price of Rmb18, implying 15x 2026e and 14x 2027e P/E and offering 19% upside.

Risks

Disappointing demand; sharper-than-expected fluctuations in pulp prices; disappointing construction progress of production base in Laos.