3Q26 results in line with our expectations Sun Paper announced its 1–3Q26 results: Revenue rose 10.5% YoY to Rmb31.96bn and net profit attributable to shareholders grew 16.9% YoY to Rmb2.92bn. In 3Q26, revenue rose 13.0% YoY and 3.0% QoQ to Rmb11.10bn, and attributable net profit rose 34.9% YoY and fell 7.1% QoQ to Rmb971mn, in line with our expectations.

Trends to watch

Gross profit remained resilient amid industrywide weakness. Gross margin fell 0.6ppt QoQ and rose 1.8ppt YoY to 15.9% in 3Q26. 1) Packaging paper: We believe revenue from packaging paper maintained double-digit growth. Sales volume rose QoQ, as Yandian's 700,000t packaging paper production facility started operation in August, Nanning's linerboard production facility ramped up, and paper prices rose QoQ (Sublime China Information: ASP of linerboard and corrugated paper rose 4.7% and 9.8% QoQ in 3Q26). Looking ahead, rising wastepaper costs and stocking up before the holiday may support price hikes.

2) P&W paper: P&W paper prices continued to decline in 3Q26 and remained at historical lows (Sublime China Information: ASPs of offset paper and coated paper fell 2.1% and 1.8% QoQ in 3Q26), and we expect weakness in the P&W paper segment to continue amid the imbalance between supply and demand. As the firm's shift from P&W paper to linerboard worked to offset the impact, its gross margin remained stable despite industrywide pressure.

Commencement of existing projects at Shandong base to support steady growth in output and sales volume. The Yandian project has been gradually recognized as fixed assets, with the value of projects under construction down 29.7% compared with the beginning of the year. 700,000t of high-grade packaging paper production capacity came online in August, and 600,000t of bleached chemical pulp production capacity commenced operation in September. We expect these facilities to run for the full fourth quarter, with depreciation recognized accordingly.

In view of the pace of project implementation, we expect sales volume to grow more than 10% in 2026 and the rising proportion of proprietary pulp to dilute costs, providing core support for earnings growth.

New projects to facilitate further expansion of production capacity. Nanning's 500,000t natural-color pulp and 600,000t specialty paper projects and Yandian's 0.5mnt chemical pulp and 0.6mnt linerboard facilities are scheduled to start trial production in 4Q27, adding a total of 1mnt of pulp and 1.2mnt of paper to the firm’s production capacity. As these projects gradually reach their designed capacity, we expect the firm's total papermaking capacity to exceed 10.5mnt by then, and its product mix to extend to high value-added specialty paper and green packaging materials. We expect the firm’s results to grow steadily in 2027.

Financials and valuation

We maintain our 2026 and 2027 earnings forecasts largely unchanged. We estimate the firm’s attributable net profit at Rmb3,614mn and Rmb3,947mn for 2026 and 2027. The stock is trading at 10.00x 2026e and 9.10x 2027e P/E, and we maintain our OUTPERFORM rating and target price of Rmb18.50. Our target price corresponds to 14.60x 2026e and 13.40x 2027e P/E, implying 46.25% upside.

Risks

Disappointing demand; higher-than-expected new capacity in the industry; disappointing const ruction of Laos projects.