Preannounces 2023 attributable net profit at Rmb95-143mn

Shanying International preannounced its 2023 results: Net profit reached Rmb95mn-143mn (vs. -Rmb2.26bn in 2022), turning profitable YoY, and recurring attributable net profit was Rmb250mn-550mn. In 4Q23, median of the net profit was Rmb235mn, while that of the recurring attributable net profit was Rmb59mn. The firm’s preannounced 2023 earnings missed our forecasts and market expectations, mainly due to slow demand recovery and larger-than-expected impact from imported paper.

Trends to watch

Prices improved slightly in 4Q23; net profit per tonne continued to recover quarter by quarter. Prices of linerboard and corrugated board edged up in October due to restocking amid the peak season, and fell in November due to intensifying price competition. In the sectors we track, prices of linerboard and corrugated board only stood at about Rmb70/t and Rmb135/t in November, indicating weak recovery. In 4Q23, the firm’s net profit increased by over Rmb50/t to more than Rmb100/t (vs. about Rmb50/t in 3Q23), as per-tonne costs declined amid rising capacity utilization rate.

Prices likely to hit new lows in 1Q24; we expect per-tonne profit to recover slowly quarter by quarter in 2024. In 2024, we think the linerboard and corrugated board industry will likely face pressure from oversupply, as domestic demand may remain weak and industry leaders have abundant capacity slated to come online this year. Meanwhile, given that the zero tariff on imported paper will remain unchanged in 2024, we expect the import volume of imported linerboard and corrugated paper to stay above 8.00mnt in 2024 (vs. 8.54mnt in 2023). However, we think its impact may ease significantly.

We note that expectations of rising ocean freight rates may further push up costs of imported paper, mitigating the impact of imported paper on domestic paper prices. We think paper prices may hit a new low in 1H24, a typically slack season. In addition, we are optimistic that industry leaders will maintain slow recovery quarter by quarter in 2024, while small- and medium-sized paper firms will likely see further declines in capacity utilization rate and exit the market after being in the red for more than one year.

Slowing capacity expansion; watch marginal changes in regional markets. According to the firm’s announcement, it has slowed the construction of some production bases, due to the industry cycle and its business operations. Nine Dragons Paper has also announced that it would cancel the construction of the 300,000t linerboard production facilities in Beihai. In 2024, the marginal increase in industry supply would be lower than the market had expected.

According to our statistics, new capacity of leading companies in 2024 will consist of: 1) Shanying’s 300,000t capacity in Jilin, which came on stream in January; 2) Wuzhou Special Paper’s 600,000t capacity in Hubei; and 3) Nine Dragons’ 1.2mnt Phase II project in Hubei. We think small and medium-sized papermakers are unlikely to maintain capacity expansion as their earnings are at bottom levels. In addition, we suggest watching regional market performance in 2024. Given that new capacity is concentrated in central and southern China, we think prices in these regions may come under significant pressure in 2024.

Financials and valuation

Given weaker-than-expected demand recovery, we cut our 2023 net profit forecast by 34% to Rmb130mn. We keep our 2024 net profit forecast unchanged at Rmb1.1bn and introduce our 2025 net profit forecast at Rmb1.4bn. The stock is trading at 7x 2024e and 5x 2025e P/E. We maintain OUTPERFORM. As market risk appetite remains low, we cut our target price 17% to Rmb2.5, implying 10x 2024e and 7x 2025e P/E, offering 44% upside.

Risks

Disappointing demand; incremental supply exceeds expectations; excessive gearing ratio.