WUZHOU SPECIAL PAPER GROUP(605007)：COST PRESSURE PERSISTS IN 1Q23;ENTERING A NEW CYCLE OF RECOVERY IN 2Q23

　　4Q22 results miss our and market expectations
　　Wuzhou Special Paper Group announced its 2022 results: Revenue rose 62% YoY to Rmb5.96bn, and attributable net profit fell 47% YoY to Rmb205mn. In 4Q22, attributable net profit was negative Rmb19mn, missing our and market expectations, mainly due to high shutdown expenses of Jiangxi base and high pulp costs.
　　Production and sales volume to rise driven by new food cardboard capacity: The 500,000t/yr food cardboard base in Jiangxi is ramping up production rapidly, driving full-year sales volume up 64% YoY to 960,000t, with food cardboard sales volume doubling. The ASP of core food cardboard fell 3% YoY to around Rmb6,159/t, dragging the overall ASP down 2%.
　　Profit under pressure due to high pulp prices and expenses: In 2022, a surge in pulp prices and an accident at the Jiangxi base affected production for around two months, dragging GM and net margin down 8ppt and 7ppt YoY to 8% and 3%. Financial expenses rose 220% YoY to Rmb123mn due to rising interest on bonds payable and bank loans.
　　Cash flow weakening; capex remains at the peak. Full-year operating cash flow fell 87% YoY to Rmb36mn, mainly due to stockpiling raw materials. In recent years, the firm has pushed forward the construction of production bases in Jiangxi and Hubei, and its capex reached Rmb989mn in 2022. We note that the firm plans to spend over Rmb10bn on its Hubei production base, and its financial expenses and cash flow may remain under high pressure as its capex peaks in 2023-2025.
　　Trends to watch
　　Pressure lingers in 1Q23; to enter a new recovery cycle in 2Q23. We note that in 1Q23, the firm still used the high-priced pulp purchased in 4Q22 (e.g., the price of hardwood pulp consumed was still over US$800/t), and shipments were weak in the off-season. As a result, high pressure on earnings continued in 1Q23. Looking ahead to 2Q23,
　　Cost: According to feedback from the industry, leading paper mills have almost used up their high-priced inventories and started to use low-priced raw materials (e.g., hardwood pulp purchased at US$700/t or less).
　　Prices: Ivory board prices bottomed. However, we note that the firm mainly produces higher-end food cardboard. Although prices are likely to drop due to falling costs, their prices are more resilient than bulk paper. We see a clear recovery trend for the firm from 2Q23, which means earnings from the pulp-paper price scissors may increase QoQ, especially in 2-3Q23, which may see ample upside.
　　The firm is in the peak of capacity expansion, and its Hubei base is set to expand production capacity in 2024. We expect full-year sales volume to rise over 15% YoY to more than 1.1mnt in 2023, as food cardboard capacity reaches full capacity, new tracing paper and heat transfer paper ramps up, and 300,000t/yr of the bulk paper production line is upgraded to high-GM specialty paper. Once Jiangxi's 300,000t/yr chemi-mechanical pulp (CMP) production facilities start operation in late 2023, we expect the firm's 500,000t/yr food packaging paper CMP capacity in Jiangxi to largely achieve self-sufficiency, further boosting the firm's advantage in food packaging paper.
　　We think the firm's main growth driver in 2024 will come from the construction of a packaging paper production line in Hanchuan (Hubei province) (around 600,000t/yr), which should enrich its product portfolio and drive up its sales volume and profit after starts operation. We also suggest paying attention to cash flow during the expansion.
　　Financials and valuation
　　We maintain our 2023 net profit forecast unchanged at Rmb555mn and introduce 2024 net profit forecast at Rmb760mn. The stock is trading at 12x 2023e and 8x 2024e P/E. We maintain OUTPERFORM and TP of Rmb20 (14x 2023e and 11x 2024e P/E), implying 25% upside.
　　Risks
　　Disappointing demand; sharper-than-expected decline in pulp prices; intensifying competition.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。