2Q26 results beat our expectations

Sun Paper announced its 1H26 results: Revenue rose 9.1% YoY to Rmb20.86bn, and net profit attributable to shareholders grew 9.6% YoY to Rmb1.95bn. In 2Q26, attributable net profit grew 16.8% YoY and 15.2% QoQ to Rmb1.05bn. The firm’s results beat our and market expectations, mainly due to improved sales volume and prices of linerboard and corrugated board and higher-than-expected profit per tonne.

Comments. 1) Packaging paper: In 1H26, revenue from kraft linerboard and corrugated board rose 36% and 292% YoY to Rmb7.08bn and Rmb280mn, which we attribute to price hikes (according to Sci99.com, average prices of linerboard paper and corrugated board rose Rmb130/t and Rmb340/t YoY in 2Q26 to Rmb3,650/t and Rmb2,890/t, mainly thanks to cost support, price hikes and issuance of shutdown notices by paper mills, and strong export orders), ramp-up of new production capacity at the Nanning base, and the recent conversion of some P&W paper production lines to corrugated paper production. Looking ahead, we are upbeat on price hikes driven by the arrival of the traditional peak season in September, and the firm's earnings growth driven by capacity expansion.

2) P&W paper: In 1H26, revenue from offset paper and coated paper fell 5% and 30% YoY to Rmb4.0bn and Rmb1.42bn, mainly due to supply-demand imbalance in the sector, which drove down paper prices (according to Sci99.com, ASP of offset paper and coated paper fell Rmb630/t and Rmb1,020/t YoY to Rmb4,610/t and Rmb4,530/t in 2Q26). Looking ahead, we expect the decline in P&W paper prices to slow marginally, given that some production lines in the industry have recently switched to corrugated paper production.

Trends to watch

We expect earnings to grow steadily over 2026–2027, thanks to the smooth commencement of several projects at the Shandong base and the planned new projects at the Nanning base. A number of projects at the firm's Shandong base commenced operation: The 140,000t specialty paper project came online in January, the 700,000t high-end packaging paper project started operation in August, and the 600,000t bleached chemical pulp project started trial production in late August. We expect its output and sales volume to grow more than 10% YoY in 2026.

In addition, the firm1 announced plans to build a 500,000t natural-color chemical pulp project and a 600,000t specialty paper project at its Nanning base with a total investment of no more than Rmb5bn. Trial production is scheduled to begin in 4Q27. We estimate that the firm's papermaking capacity will exceed 10.5mnt by then, and we are upbeat on its steady earnings growth in 2027.

Financials and valuation

Given the recent uptrend in the packaging paper sector and the contribution from the ramp-up of new projects, we raise our 2026 and 2027 net profit forecasts 5% and 6% to Rmb3.61bn and Rmb3.95bn. The stock is trading at 11.7x 2026e and 10.7x 2027e P/E. We maintain an OUTPERFORM rating and raise our TP 3% to Rmb18.5, as the new projects will further improve the firm's pulp and paper integration. Our TP corresponds to 14.3x 2026e and 13.1x 2027e P/E, implying 23% upside.

Risks

Weaker-than-expected demand; higher-than-expected new production capacity; disappointing facility construction in Laos.