SUN PAPER(002078)：SOLID RESILIENCE AT INTEGRATED AND DIVERSIFIED BUSINESSES;LEADER STEADILY ADVANCING

　　2022 results in line with our expectations
　　Sun Paper announced its 2022 results: Revenue rose 24% YoY to Rmb39.8bn, and attributable net profit fell 5% YoY to Rmb2.81bn, in line with market and our expectations.
　　1. New production capacity ramping up; combined pulp and paper capacity exceeded 10mnt: In 2022, the firm's paper and pulp sales volume rose 7% and 72% YoY to 5.57mnt and 1.84mnt, and its combined paper and pulp production capacity exceeded 10mnt as of end-2022. Sun Paper's three production bases in Shandong, Guangxi, and Laos have entered a new stage of coordinated development.
　　2. Solid resilience on the back of pulp-paper integration, diversified business layout: In 2022, stagflation weighed on the papermaking sector and sector earnings hit historical lows. With this as a backdrop, we estimate that the firm's gross profit per tonne fell only Rmb124/t in 2022 to Rmb662/t thanks to its high self-sufficiency ratio of self-produced pulp (more than 50%). As upstream pulp prices continued increasing, the firm adjusted the portion of pulp sold and increased new production capacity for chemical pulp. Pulp revenue soared 87% YoY in 2022 to Rmb9.5bn and gross profit exceeded Rmb1,100/t, with dissolving pulp being the core growth driver.
　　3. Capex for the Guangxi production base peaked; operating cash flow remained solid: Net operating cash flow was Rmb3.82bn in 2022. The firm is building production facilities in Guangxi, with capex of over Rmb4.6bn, suggesting mild pressure on free cash flow in the near term. Debt-to-asset and net gearing ratios were 52% and 65%, with liabilities relatively manageable at present.
　　Trends to watch
　　Cost pressure on papermaking persists in 1Q23; demand to recover in 2023. We note that the first quarter is traditionally a slack season with weak shipments in the industry. We think that the firm’s 1Q23 costs will remain under pressure due to the use of high-priced raw materials purchased in 4Q22. We think that this, coupled with falling pulp prices YTD, weighed on both QoQ and YoY earnings growth in 1Q23. Looking ahead:
　　1. Papermaking: Prices of pulp and domestic waste paper (key raw materials) have fallen, which may boost the recovery of net profit per tonne of the papermaking business. Thanks to falling prices of waste paper from the US and wood chips, we believe that the earnings elasticity of containerboard and dissolving pulp at the Laos production base emerged first, which may become a major earnings growth driver in 2023.
　　2. Pulp: The firm's pulp business is also under pressure amid falling pulp prices. However, we note that the current purchase price of wood chips has fallen significantly vs. 2022, and the firm's self-produced pulp cost has declined. Moreover, given changes in earnings from pulp and paper, the firm can adjust the self-sufficiency ratio of pulp and the portion of pulp sold. Thus, we believe that the risks of the firm’s pulp business are manageable, and expect the business to be bolstered by rising paper prices amid recovering demand in 2023.
　　Improving forest-pulp-paper integration; production facilities in Nanning to boost medium-term growth. Sun Paper has more than 10mnt/yr paper and pulp capacity and continues to improve forest-pulp-paper integration. The firm has expanded production capacity despite a sector downturn and has announced plans to build a 5.25mnt forest-pulp-paper integrated project in Nanning in Guangxi (Phase I project: 2.2mnt high-end packaging paper and 0.65mt self-produced pulp). The firm’s total production capacity for paper and pulp should amount to more than 15mnt/yr once the Nanning project is in operation, and cover a full range of packaging paper, printing & writing paper, and specialty paper.
　　In the medium term, we think that high-quality fiber and proximity to ports will become increasingly rare in the industry. We are upbeat on the firm’s strong margin of safety and potential upside in the medium term, given its strong competitive advantages in Shandong and Guangxi provinces, forest resources in Laos, high-quality fiber resources, clear division of work among its three major production bases, and rare forest resources.
　　Financials and valuation
　　Given the sharper-than-expected decline in pulp prices, we cut our 2023 net profit forecast 6% to Rmb3bn but maintain our 2024 forecast at Rmb3.5bn. The stock is trading at 11x 2023e and 9x 2024e P/E. Given possible recovery of risk appetite in the papermaking sector, we maintain OUTPERFORM and our TP of Rmb16 (implying 15x 2023e and 13x 2024e P/E), offering 39% upside.
　　Risks
　　Sharper-than-expected decline in pulp prices; disappointing demand; sharper-than-expected increase in wood chip prices; competition intensifies.
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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。